a journey of long partnership - pakistan stock exchange mezzanine floor, house of habib building...

According to Modaraba concept in Islamic

Finance, Modaraba is a kind of partnership

wherein one party provides finance to other

for the purpose of carrying business and

sharing profits earned through mixture of

investment and expertise.

Being pioneering in Modaraba sector within

the country, First Habib Modaraba (FHM) has

developed partnership with various segments

of investors and keep on generating value for

all of them.

This partnership of FHM sown 29 years back

and now has grown manifold. Enriching every

relationship and creating huge benefits

through sharing profits every year and

complementing each other’s progress.

FHM value and encourage mutually beneficial

partnership all along on our long journey

ahead.

A JOURNEY OF LONG PARTNERSHIP

Vision

To be the leading Islamic Financial

Institution within Modaraba sector by

providing the best innovative Sharia’h

Compliant financial solutions at

maximum satisfaction of customers.

To be the leading Islamic Financial

Institution within Modaraba sector by

providing the best innovative Sharia’h

Compliant financial solutions at

maximum satisfaction of customers.

4

MissionMissionAn institution built on Trust, Integrity,

Good Governance with Commitment to

add value to all stakeholders through an

effective human r esource management

in a modern and progressive

organizational culture, maintaining high

ethical and professional standards.

An institution built on Trust, Integrity,

Good Governance with Commitment to

add value to all stakeholders through an

effective human r esource management

in a modern and progressive

organizational culture, maintaining high

ethical and professional standards.

5

A N N UA L R E P O R T 2 0 1 4First Habib Modaraba(An Islamic Financial Institution)

Credit Ratings - By Pacra

LONG TERM

AA+

SHORT TERM

A1+

The Pakistan Credit Rating Agency (Private) Limited (PACRA) has once again maintained the long-term and short-term ratings of First Habib Modaraba at “AA+” and “A1+” respectively for the period ended

th30 June 2013. These ratings denote a very low expectation of credit risk emanating from a very

strong capacity for timely payment of financial commitments.

6

Corporate Governance

Other Supplementary Information

Financial Statements

Directors’ Profile

Certificate Holders’ Information

Pattern of Certificate Holding

Statement of Compliance

Review Report to the Certificate Holders

Board Committees

Organizational Structure

Shariah Advisor’s Profile

Role of Chairman and Chief Executive Officer

Performance Evaluation of the Board

Performance Evaluation of the Chief Executive Officer

Report of the Audit Committee

Avoiding Conflict of Interest Policy

Policy for Protection of Data of the Company

IT Governance Policy

Environment and Social Responsibilities

Human Resource

Investors’ Grievance Policy

Stakeholders Engagement

Whistle Blowing Policy

Memberships

FHM Awards Calendar

FHM Events Calendar

Awards & Accolades

Products Detail

Shariah Advisors Review Report

Auditors’ Report to the Certificate Holders

Balance Sheet

Profit & Loss Account

Statement of Comprehensive Income

Cash Flow Statement

Statement of Changes in Equity

Notes to the Accounts

Glossary

Management Review and Representations

Stakeholder's Information

Vision and Mission

About First Habib Modaraba (FHM)

Corporate Information

Code of Business Conduct and Ethics

Core Values

Strategic Corporate Objectives

Directors’ Report

Economic Review

Financial Sector Overview

Business Review of FHM

Awards and Achievements

Business Development Activity

Business Outlook

Future Strategy

Risk Management Framework

Information Technology

Internal Control

Liquidity Risk Management Process

Strategic Key Performance Indicators

Business Continuity Plan & DRP

Segment-Wise Review

Energy Saving Measures

Quality Assurance

Sustainability

Corporate Social Responsibility

Energy Conservation

Customer Protection Measures

Environment Protection Measures

Business Ethics and Anti-Corruption Measures

Key Financial Data of Six Years at a Glance

Summary of Cash Flow

Graphical Presentation of Financial Summary

Balance Sheet Composition

Horizontal Analysis

Vertical Analysis

Comments on Financial Ratios

Value Added Statement

Share Price Sensitivity Analysis

Variance in Quarterly Report

Dupont Analysis

Notice of Annual Review Meeting (ARM)

ARM Decision and its Implementation

Customer Satisfaction

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7

Mission

8

Alhamdulillah, First Habib Modaraba (FHM) has completed 29 years of

successful business operation. FHM being the pioneer in Modaraba

sector grew over the year on sound footing with the commitment of

adding value to all our stakeholders particularly our investors.

FHM is well on its Vision to be a leading Islamic Financial Institution

within the Modaraba sector and its mission to build institution on Trust,

Integrity and enhance value through excellent performance and good

governance.

The efficacy of FHM’s business strategy and prudent risk management

policies have always supported the management to maintain

outstanding assets quality while ensuring sustainability of performance

despite the increasingly competitive operating environment in Pakistan’s

financial market.

Since last several years FHM has been securing AA+ rating as long term

rating from Pakistan Credit Rating Agency Ltd., (PACRA). Besides, FHM

has received several awards and recognition on best performance, best

corporate report, best corporate disclosure and corporate excellence

received from reputable bodies, such as NBFI and Modaraba

Association, ICAP and ICMAP, Management Association of Pakistan, and

SAFA an apex body of SAARC.

By the grace of God, FHM is among one of the best Islamic Financial

Services Institutions within non-banking financial sector. Sound and

satisfactory performance of FHM on year on year basis is outcome of

our well planned corporate strategy and business focus which reach us

to target market and capture right opportunities in right time.

Our strategy remains clear, focused and well targeted on business

development, on building deep and long standing relationships with our

all partners and on improving the service delivery and solutions.

We will continue our steady performance by striking a careful balance

between risk and reward for achieving a sustained growth under the

Shariah principle of Islamic Finance.

About

First

Habib

Modaraba

9


Corporate Information

AUDITORS

Muniff Ziauddin & Company

Chartered Accountants

LEGAL ADVISOR

Mohsin Tayebaly & Company

AUDIT COMMITTEE

- Chairman

Mr. Abbas Ali Muhammad - Member

COMPANY SECRETARY

Mr. Adnan Thanwey

REGISTERED OFFICE

5th Floor, HBZ Plaza (Hirani Centre)

I.I. Chundrigar Road, Karachi.

BOARD OF DIRECTORS

Mr. Mohammad Haroon Ahmed

- Chairman (Non-Executive Director)

Mr. Muhammad Shoaib Ibrahim

- Chief Executive Officer

Mr. Abbas Ali Muhammad

Mr. Wazir Mumtaz Ahmed

Mr. Shakeel Ahmed

Tel: 021-32635949-51Fax: 021-32627373Mr. Wazir Mumtaz Ahmed - Member

- Secretary

GEOGRAPHICAL PRESENCE - BRANCH OFFICES

REGISTRAR:

Noble Computer Services (Pvt.) Limited

Mezzanine Floor, House of Habib Building

(Siddiqsons Tower),

3-Jinnah Cooperative Housing Society,

Main Shahrah-e-Faisal, Karachi, Pakistan.

Tel: 021-34325482-87

BANKERS

Habib Metropolitan Bank Limited (Islamic Banking)

Burj Bank Limited

Al Baraka Bank Pakistan Limited

Bankislami Pakistan Limited

Lahore Branch:

Islamabad Branch:

Multan Branch:

1st Floor, 5-Z Block, Phase III, Defence Housing Authority, Lahore. Tel: 042-35693074-76, Fax: 042-35693077

Office No. 7, Mezzanine Floor, Razia Shareef PlazaBlue Area, Islamabad.Tel: 051-32278865-67, Fax: 051-2278868

Mezzanine Floor, Abdali Tower,Abdali Road, Multan.Tel : 061-4500121-3, Fax : 061-4588810

(Non-Executive Director)

(Non-Executive Director)

-

-

Web www.habibmodaraba.com

Email : [email protected]

:

HUMAN RESOURCE COMMITTEE

- ChairmanMr. Abbas Ali Muhammad

- MemberMr. Wazir Mumtaz Ahmed

- Member

Meezan Bank Limited

Mr. Mohammad Hashim (Non-Executive Director)-

Mr. Syed Rasheed Akhtar (Non-Executive Independent Director)-

Ahmed & Qazi Advocates & Legal Consultants

Mr. Syed Rasheed Akhtar

Mr. Syed Rasheed Akhtar

UAN 111-346-346:

10

A N N UA L R E P O R T 2 0 1 4

Code of Business Conduct and Ethics

FHM’s Code of Ethics spells out the standards of behavior

and operating principles to be followed by the employees. Our

Code of Ethics requires that it is necessary to ensure that the

appropriate standards of behavior are followed to the letter and spirit in

accordance with the approved and agreed Code of Conduct by the

employees of FHM.

We being an Islamic Financial institution are more responsible to maintain ethical

culture based on Islamic principles. FHM believes that the upholding of a well-

founded ethical environment is critical for our valued customers, regulators and

other stakeholders. Therefore, for nurturing of ethical culture, employees of FHM

shall:

¬Uphold Shariah governance culture and atmosphere in line with Islamic

principles.

¬Act with integrity, honesty, dignity and in an ethical manner when dealing with

customers, regulators and other stakeholders.

¬Not engage in any unprofessional conduct involving dishonesty, fraud, deceit or

misrepresentation or commit any act that reflects adversely on honesty,

trustworthiness or professional competency.

¬Should uphold fair view while choosing right and wrong.

¬Not make hindrances or restrain others from performing their professional

obligations.

¬Maintain update knowledge and comply with all applicable laws, rules and

regulations.

¬Maintain strong compliance culture.

¬Respect confidentiality and privacy of customers, investors and others

with whom they deal.

11

OU

R C

OR

E V

ALU

ES A

RE.

...Our corporate objective shall be customer

oriented when assessing, designing and

introducing new products, services and

technology.CUST

OMER

FI

RST

CORP

ORAT

E GO

VERN

ANCE

RESP

ONSI

VE

INTE

GRIT

YTE

AM W

ORK

QUAL

ITY

SERV

ICE

Integrity means speaking and acting honestly and

sincerely. Our unwavering belief in integrity is what

allows our customer to entrust their business to us.

It is essence of our ability to succeed as a trusted

and preferred financial institution to our clients. With

common goals and team spirit, we will uphold our

values and achieve our corporate goals.

Our goal is to respond to a rapidly changing business

environment in a timely manner through best business

practices by reinforcing our ethical standards and good

governance.

How we respond to our customers will influence

their belief in our commitment to them. A proactive

response is often unexpected and more effective

for that. It clearly demonstrates our willingness to

go beyond the expected.

Our core value is to develop customer service

oriented culture with special emphasis on customer

care and convenience. The essence of quality

service is embodied through every interaction that

we have, within ourselves and with our customers.

12

To be the leading Modaraba within the Modaraba sector as an

Islamic Financial Institution.

To carry out all business transactions in line with approved mode of

Shariah principles of Islamic finance.

To maintain high ethical and professional standards.

To build a high performance culture, with growth oriented focus.

To promote economically productive ethical activities.

To achieve sustainable growth and profitability in all areas of

business of FHM.

To provide state of art services to customers and develop service

oriented culture within FHM.

To broaden the area of technology to ensure operational efficiency,

enhance delivering capability and high service standard.

To develop strong compliance culture and sound risk management

framework.

To add Certificate Holders value through better performance and

sound return on their investment.

To remain innovative and explore new avenues for growth and

profitability.

Strategic Corporate Objectives

13


Directors’ Report

On behalf of the Board of Directors, I am pleased to present the audited accounts of the First Habib Modaraba (FHM) for the

year ended June 30, 2014.

Profit before modaraba company remuneration 329,489,599

Modaraba company remuneration (32,948,960)

Sales tax on Management company remuneration (5,271,834)

Profit for the year 285,443,429

Un-appropriated profit B/F 11,116,436

Profit available for appropriation 296,559,865

Earning per certificate of Rs. 5/- each 1.42

Cash dividend @ 22% 221,760,000

Transfer to Statutory Reserve 57,088,686

Unappropriated Profit C/F 17,711,179

296,559,865

The board of directors has pleased to declare a cash dividend of 22% i.e. Rs.1.10 per certificate of Rs.5/- each for the period

ended 30th June, 2014.

Financials

Appropriations

Dividend payment

14


Economic ReviewD I R E C T O R S ’ R E P O R T

Despite challenges, the country’s

economy has performed reasonably

well during 2013-2014 as compared

to corresponding period of last year.

The year represents a completion of

the first fiscal tenure of the existing

Government. The ruling party

inherited some major challenges

particularly terrorism, lawlessness,

power shortage, economic

mismanagement, unemployment and

price hike. However, the major

economic indicators including growth

rate, inflation, foreign remittances,

foreign exchange reserves, external

trade and industrial growth have

shown satisfactory position to some

extent.

The economy is showing encouraging

sign by following serious economic

agenda and striving sincerely to

implement it. Early positive results,

particularly stabilizing foreign

exchange reserves, appreciation of

exchange rate, better industrial

growth and exceptional increases in

remittances, historical heights of

Karachi Stock Exchange, successful

launching of Eurobond and auction of

3G/4G licenses are the key

achievement of present government.

The GDP is estimated to have grown

towards the end of the year at a rate

of 4.1% as compared to the budgeted

rate of 4.4% for the year and a rate of

3.7% in the prior year. The growth

momentum is broad based and all the

three major sectors namely

agriculture, industrial and services

have provided support to improve

economic growth. The industrial

sector particularly Large

Manufacturing sector posted good

growth as compared to growth rate of

last year

The government borrowing for the

outgoing fiscal year has also reduced.

Lower borrowing from domestic

channels by the government was

largely on account of foreign funds

received by the country. The inflation

for FY14 witnessed an uptick to 8.62%

in contrast with preceding year

inflation of 7.36%. It is pertinent to

note that preceding year inflation was

the lowest inflation numbers recorded

in the preceding five years.

In South Asia, performance of

Pakistan is improving quantitatively

and qualitatively as the growth is

broad based and touched almost all

sectors of the economy. The growth

recorded for 2013-14 is the highest

level of achievement since 2008-09

and it is expected that the same will

increase further in coming years as

business climate is gradually

improving in positive direction.

In a report issued early this month,

IMF has expressed satisfaction on the

overall performance of the

government in meeting the targets

agreed between the government and

IMF. Recently Moody's Investors

Service has upgraded the outlook of

Pakistan’s economy from negative to

stable. In a report published by the

agency on the progress of Pakistan's

economy, Moody's said the country's

foreign exchange reserves had

significantly improved and its current

account deficit is also under control.

In latest update on monetary policy

statement, the State Bank of Pakistan

(SBP) has decided to keep the policy

rate unchanged at 10 percent.

According to SBP the economic

conditions are certainly better at the

beginning of FY15 than a year ago but

a detailed assessment of the

economy indicates that some

challenges and vulnerabilities are still

remained with economy.

In conclusion we expect that overall

positive growth sentiments together

with continuation of IMF program,

encouraging note of ADB and

Moody’s about the Pakistan’s

economy, government’s privatization

plan, stability of Pak Rupee, high

sentiment of investors and better

perception of Pakistan in global

market, this result in further

strengthening of business

environment and sound external

position in current financial year.

However, security issues and non-

ending energy crises will remain

major challenges for economic growth

at a desire level.

2.6

3.63.8 3.7 4.1

0

1

2

3

4

5

FY-10 FY-11 FY-12 FY-13 FY-14

15

Real GDP Growth %

RU

PEES

IN

bil

lio

n

8.91

11.2

13.19

13.92

15.47

0

5

10

15

20

FY -10 FY -11 FY -12 FY -13 FY -14

Workers Remittances


Financial Sector Overview

Financial institutions of our country

deliver significant and unique value to

the country’s economy and

businesses, investors, and savers.

Particularly our banking sector is

playing vital role for economic

development of Pakistan.

The banking sector in during the year

2013 remained slightly under pressure

due to challenging operating

environment with high level of

competition and economic

uncertainties. However, performance

for the year ended 31st December,

2013, remained satisfactory and

increase in overall assets, deposit and

profits have been reported. During

the years the assets grew at 8% and

deposit base has expanded by 14%.

Profitability of banks has risen and

major share of profit remain with five

big banks of the country.

After a gap of six years, advances of

Pakistan scheduled banks grew by

10.8% in FY14 as compared to 3.4%

in FY13. According to report the

advances growth is highest since

2008 economic crisis and is broad-

based mainly in external trade

activities, working capital, fixed

investment and consumer financing.

Likewise Islamic Banking industry is

also growing at good pace with

annual growth rate of around 30%

since last several years. The assets

size of Islamic banks is reached to

over one trillion Pak rupees and

deposits grown to over Rs.800.0

billion with branch network of about

1300.

The NBFI & Modaraba Sector has also

performed well for the period ended

30th June, 2013 particularly with

reference to some of the members

who turnaround their entities and

booked profits during the year after

booking losses since the financial

tsunami of 2008. The Modaraba

Sector continued to perform well

within the NBFI sector and distributed

good dividends. The asset base of the

Modaraba sector grew from Rs.29,196

million to Rs.31,434 million (an

increase of 7.5% y-o-y). The total

equity of the Modaraba sector went

up to Rs.13,824 million.

Recently government has formed

Steering Committee for promotion of

Islamic banking and finance within the

country. Modaraba sector has also

become the part of this committee

and a subcommittee formed by the

Government having representation of

SBP and SECP. We are hopeful that

work undertaken by these committees

will provide comprehensive solutions

across the board for further promotion

of Islamic finance within banking and

non-banking sector.

SECP is very keen for development of

a strong NBF sector. A year back

SECP constituted an NBF Sector

Reform Committee to conduct an in-

depth review of the whole business

model and prevalent regime with a

fresh perspective and suggest

reforms for the growth of NBF sector.

The recommendations of the

Committee were published in the form

of a report for public consultation. A

good number of market professionals,

industry participants and financial

institutions provided comments on the

report. At present SECP is in process

to change regulatory framework of

Modarabas and NBFCs in the light of

recommendations of reform

committee and it is expected that

same will be implemented soon. We

are hopeful that reform will greatly

support for expansion of NBFC and

Modaraba sector.

D I R E C T O R S ’ R E P O R T

23,087

24,469

26,343

29,195

31,434

20000

22000

24000

26000

28000

30000

32000

34000

2009 2010 2011 2012 2013

PK

R IN

MIL

LIO

N

16

Total Assets of Modaraba sector

Share of FHM in Modaraba sector

Following table shows the market share of FHM as per the NBFI & Modaraba Association of Pakistan Year Book 2013 for the financial year ended 30th June, 2013.

(Rupees in million)

Total Equity 13,824 3,053 22%

Total Assets 31,434 4,719 15%

Ijarah Assets 10,100 2,942 29%

Net Profit 2,035 992.39 49%

Combine FHM Share % of FHMposition of 24 share to

Modarabas All Modarabas


Business Review of FHM

Alhamdulillah, FHM has completed

29th year of successful business

operation as non-bank Islamic

financial institutions within the

Modaraba sector. The enviable track

record of more than quarter of century

is the success story of sheer hard

work and commitment to provide the

investors a sound and continuous

return. Consistency in distribution of

dividends among the certificate

holders along with increase in

certificate holders' equity has made

FHM a leading Modaraba within the

sector.

FHM being pioneer in the Modaraba

and Non-Banking Islamic Financial

sector played a vital role for promotion

of Islamic Finance in Pakistan's

Islamic Financial Market. Over the

years the FHM has been continuously

recognizing for its excellent

performance, good corporate

governance, best report culture and

sound and stable credit rating from

various prestigious institutions.

Our successful performance history

shapes the way for our future growth

opportunities. The management

remains committed in providing its

valued investors with good return on

their investment. We have been

consistently gaining our due share

within the market over the years. The

confidence of our all stakeholders are

also strengthening on the financial

stability of FHM.

FHM focus on growth in prudent

manner, commitment to deliver

customer centric solutions through

well defined corporate policies and

coordinate action with team work for

long term sustainable development.

During the year overall performance

of the entire financial sector remained

under pressure due to challenging

operating environment with high level

competition and economic

uncertainties. However, under these

challenging conditions, the

performance of FHM remained

satisfactory. The profitability has been

maintained despite of reduction of

discount rate by the SBP and increase

of cost of business due to inflationary

pressure within the economy.

During the year under review the

disbursements with respect to Ijarah

(lease) and Diminishing Musharkah

financing were made of Rs.1,402.0

million and Rs.900.0 million

respectively. Major portion of

financing remain within the assets

category of motor vehicle i.e. 76% of

total financing and leading sector of

disbursement were targeted such as

Pharmaceuticals, Services, Food &

Allied and Chemicals. Size of balance

sheets has also been enhanced by

11% over last year.

Keeping in view of our strategy on

product diversification, we have been

continuously concentrating on the

Diminishing Musharkah financing

product. Disbursement in this

segment made of 41% of total

financing as compared to 16% of last

year. Our branches outside Karachi,

i.e. Lahore, Islamabad and Multan

have made significant contribution in

disbursement as compared to

corresponding period of last year and

their share remain 52% of total

financing. Moreover, good new

corporate customers had also been

added by these branches which will

support to further enhance business

volume in respective areas.

On liability side, good growth within

the Certificate of Musharkah (COM)

has also been made. The outstanding

amount under COM was Rs.1,533.0

million at the end of year as compared

to Rs.1,007.0 million of corresponding

period of last year which grew by

52%. Our all branches particularly

Karachi branch have made their good

efforts in channelizing deposit under

COM which has greatly supported for

generation of business volume at

desired level.

Alhamdulillah, during the year

recovery on our financing portfolio

remained at satisfactory level due to

our continuous cautious lending

approach while financing.

We Insha’Allah, keep focus on our

core business objective i.e. to build

quality assets portfolio in prudent

manner in order to give sound and

stable return to our investors by

following best business practices and

good governance.


17


Awards and achievements

Alhamdulillah, once again FHM has

earned a series of accolades from

prestigious institutions.

For the financial year ended 30th

June, 2013, the NBFI and Modaraba

Association of Pakistan, has awarded

best performing Modaraba award to

FHM within the Modaraba sector. The

FHM has secured 1st position in

above award category.

So far FHM has received 13 awards

from NBFI and Modaraba Association

of Pakistan within last 15 years.

The Joint Committee of Institute of

Chartered Accountant of Pakistan

(ICAP) and Institute of Cost &

Management Accountant Pakistan

(ICMAP) in their ceremony held on

22nd August, 2013 has awarded

“Best Corporate Report Award” to

FHM under the category of NBFCs.

According to sector segmentation of

above committee, the NBFCs sector

consisting on Insurance, Leasing,

Investment banks, and Modarabas.

Within the NBFCs sector five listed

entities were selected and awarded

for best report. Alhamdulillah, FHM is

Best performing Modaraba Award

from NBFI and Modaraba

Association of Pakistan

Best Corporate & Sustainability

Report Award from ICAP/ICMAP

one of them, secured “Second

Position”. By the Grace of God, this is

fourth consecutive year for best

corporate award and FHM is the only

Modaraba in entire Modaraba sector

who has been receiving this award

since last four consecutive years.

South Asian Federation of

Accountants (SAFA) in its award

ceremony held in Islamabad, on 3rd

May, 2014, awarded SAFA BPA

“Certificate of Merit” award to FHM

from the category of “Financial

Services Sector” for "Best Presented

Accounts" and "Corporate

Governance Disclosures" for the year

2012. Within this sector, FHM was

only nominees from Pakistan. This is

fourth consecutive “Certificate of

Merit” award to Habib Modaraba from

SAFA committee.

SAFA is an Apex Body of South Asian

Association for Regional Co-operation

(SAARC) and represents membership

of the national chartered accountancy

and cost and management

accountancy institutions in South

Asian Countries namely Bangladesh,

India, Nepal, Sri Lanka and Pakistan.

By the grace of God, this is again a

great achievement not only for FHM

but certainly an honor for entire

Modaraba and NBFI sector.

Best Presented Account Award

from “SAFA”

Corporate Excellence Award from

Management Association of

Pakistan.

Credit Rating

In 29th Corporate Excellence Awards

ceremony held in 22nd August, 2013,

the Management Association of

Pakistan (MAP) has awarded

“Certificate of Excellence” award to

FHM from the category of Equity

Investment Instruments Sector.

Alhamdulillah, since last six

consecutive years FHM has been

receiving this award. So far FHM has

secured five Excellence Certificate

Awards and one Excellence Trophy

Award.

Pakistan Credit Rating Agency

(Private) Limited, (PACRA) has again

reposed their confidence in sound

and stable position of FHM and

maintained rating scale of AA+ for

long term and A1+ for short term for

the period ended 30th June, 2013.

A1+ is highest rating in the short term

scale. PACRA updated their rating on

14th January, 2014.

As per PACRA’s assessment, these

ratings denote a very low expectation

of credit risk emanating from a very

strong capacity for timely payment of

financial commitments. PACRA further

added that FHM’s sustained market

position supplemented by robust

asset quality and low leveraging.


18


Business Development Activity

During the year under review, we have

successfully added good assets in

our financing portfolio through

financing of Ijarah and Diminishing

Musharkah (DM) to sound and good

quality customers. As diversification in

mode of financing the concentration

on enhancement in Diminishing

Mushrakah financing was made. The

share of DM financing has been

increased to 41% of total financing as

compared to 16% of last year.

Financing on other mode such as

Murabaha, Salam and Istisna are still

keeping in abeyance due to tax

issues as these modes are in nature of

buy and sale of goods and tax

authority treats income of such mode

as trading income which does not

qualify for income tax exemption

within the relevant provision under

the Tax Ordinance for Modarabas.

We are further exploring the possibility

of entering into rental business

segments of generator sets and other

equipment. Our marketing department

has made their initial study and found

sound business segment. A detail

study is in process which will cover

financial feasibility, availability of

potential customer & market, timeline

of development of infrastructure &

expertise to manage such business

including hiring of asset manager and

formation of appraisal and credit risk

management techniques.

Within our assets category, motor

vehicle is a major segment of our

financing which is mainly in corporate

sector. We reported in our last report

that due to high prices of motor car,

the corporate entities are gradually

switching to give car allowances to

their employees instead of providing

company car. We have already

started financing to corporate

employees as individual financing and

so far we have successfully

developed a small portfolio. For

2014-15, we are planning to further

expand individual car financing

segment within the employees of

good corporate entities with due care

strong credit appraisal and credit risk

management.

Commercial vehicle is also one of the

potential area within auto financing.

In past our Modaraba kept away from

this segment due to majority hold of

un-organized sector in this business.

However, as per market information

now good corporate entities are

coming in Freight Forwarding and

Logistic business and we are

considering to start financing in this

business on small level as a

diversification in assets category.

We feel that this industry plays an

important role in overall economy of

the country and it is a back bone of

any economy. A strong freight

forwarding industry is imperative if the

country is to capitalize on emerging

opportunities as well as enhancing

the efficiency of vulnerable industries.

Pakistan freight forwarding industry

has lot of potential as there are huge

movements of goods from one end to

another end within the country.

Besides, due to geographical location

of Pakistan it also offers vast

opportunities to act as transit hub for

its neighboring countries.

We are further studying to open more

new location in province of Khyber

Pakhtunkhwa (KPK) preferably in

Peshawar. FHM has no presence in

KP and as initial information gathered

by our marketing team that the

business opportunities are gearing up

in Peshawar for assets financing and

generation of funds under Sharia

compliant deposits i.e. Certificate of

Musharaka. During the year open a

one more branch in Punjab was

postponed due to not having good

experience with Multan branch. So far

our Multan branch is struggling for

generation of deposits and engaging

good corporate customer for

financing.

The new government has taking care

of energy issues and recently singed

and given go ahead of several

projects of energy sector for

generation of electricity. We feel that

by the passage of time energy crisis

will minimize and this will open new

business opportunities within the

country particularly in Punjab

province.


19


Business Outlook

The International Monetary Fund

down its 2014 forecast for global

economic growth. It reported that after

negative surprises from the United

States and China, the global economy

is now expected to grow only 3.4%

this year lowering its April estimate of

3.7%. In 2013, the world economy

grew 3.2%. The unusual harsh

weather and other factor lead to

lowering the estimated growth. The

geopolitical risks have increased due

to recent development in Middle East

which may spike oil prices and push

inflation.

If we look at Pakistan’s economy there

are encouraging sign to some extent.

However, achieving fiscal

sustainability has been a major

recurring challenge for policymakers.

Fiscal discipline which has eroded in

recent past is difficult to manage

instantly.

The Tax-to-GDP ratio remained

between 8.5pc to 9.5pc in recent

years, one of the lowest in the region,

and reflects structural imbalances. As

a result, the country has relied largely

on loan based and foreign

remittances.

Higher fiscal deficits and very limited

foreign inflows during recent past

have resulted increase in short-term

domestic borrowing and debt

servicing costs.

If we look at financial sector, over the

year private sectors lending showed

satisfactory growth. Most economists

said a healthy uptick in the private

sector is a positive sign for the

economy, indicating revival of

industrial activities. The growth in

credit off-take has started

accelerating after last few years.

Likewise, size of Islamic Financial

industry has also expanded and now

at present is around 10% of overall

banking assets base. The industry

with its increasingly international

footprint continues to demonstrate its

resilience. The range of Shari’ah-

compliant products and services

available globally have significantly

widened and capturing the market

share.

Owing to overall positive growth

sentiments and satisfactory views of

IMF and other multilateral

organizations on Pakistan, we expect

positive growth in economy which will

definitely lead to healthy business

environment.


20


Future Strategy

Global Islamic finance since its

inception decades back has grown

substantially from being a niche into a

vibrant industry. Growing annually by

more than 20 percent, the Islamic

financial industry asset base has

increased to over US$ 1.6 trillion.

Similarly in Pakistan Islamic banking

has been growing by over 30 percent

annually and now its asset base has

crossed Pak rupees 1 trillion mark.

However, with growth of this industry,

the intense competitions within the

Islamic financial institutions

particularly with Islamic commercial

banks are also growing. We being

non-banking financial institutions also

struggling hard to cope with this

challenge particularly generation of

low cost generation of funds which

Islamic banks are enjoying at great

level which support them to finance

quality customer at competitive rate.

Under the current challenging

economic environment we remain

vigilant to the changing market

dynamics and stands well positioned

to further strengthen the existing

growth momentum by focusing on

enhancing market outreach and

adding good customer within the

existing portfolio through offering

value added products and services.

As our business strategy we remain

focused on following area in 2014-15.

?Expand market outreach through

opening new locations.

?Add new good customers within

the portfolio.

?Concentrate on products as

diversification.

?Enhance size of retail deposit base

from medium to long term for good

quality lending.

?Enhance size of investment in

sound, stable and dividend paying

Shariah compliant listed securities

along with Sukuk and Musharaka

based TFCs.

?Refresh tool of risk management

processes particularly credit risk

management in line with latest

techniques.

?Further strengthen Shariah

governance and compliance

culture.

?Further develop operation capacity

of human resource through proper

training.

?Keep abreast with technological

advancements and upgrade core

application with strong focus on

better internal control and provide

state of art services to customer.

Besides, as our core corporate

strategy will also be focusing to reap

the benefits of Islamic finance industry

which is growing at good pace locally

and worldwide. We have been

continuously aligning our strategy

particularly our business development

strategies in such way to tap the

potential market of Islamic finance to

great extent as non-banking Islamic

financial institutions.


RESOURCE MOBILIZATION

INFORMATIONTECHNOLOGY

RISK MANAGEMENT

HUMAN RESOURCE

QUALITY OF ASSETS

KEY FOCUS AREAS

KEY FOCUS AREAS

SHARIAHGOVERNANCE

21


Risk Management Framework

FHM manages risk through a

framework of sound risk principles.

Risk is an integral part of the financing

business and risk management entails

adoption of several measures to

strengthen ability to cope with the

dynamics of a complex business

environment in which we operate. It

involves setting the most appropriate

course of action under uncertainty by

predicting through its experience and

then identifying, assessing,

understanding, communicating and

addressing the same.

Disciplined risk management and

control are essential to our success.

The approach to risk is grounded on

the strong practices of Corporate

Governance that are intended to

strengthen FHM’s enterprise risk

management framework and also

position the Modaraba to manage the

changing business environment in an

effective and efficient manner. Risk

management is an essential pillar of

our business strategy and is as critical

in fulfilling the objective of the

Modaraba. Risk management function

is actively involved in measuring,

controlling and reporting the risks

across the organizations.

The governance of risk management

starts with our Board, which plays an

important role in reviewing and

approving risk management policies

and practices. The firm’s governance

structure provides the protocol and

responsibilities for decision-making on

risk management issues and ensures

their adequate implementation.

We maintain a strong inter-

departmental communication link on

risk factors and encourage culture of

collaboration in decision-making

amongst all departments.

FHM’s risk management capabilities

are circle around a strong

management structure sound

information system, an effective risk-

rating system and robust policies. The

primary objective of risk management

is to maintain the FHM’s financial

strength and ensure efficient capital

deployment to support business

growth.

At FHM, we possess a comprehensive

risk management framework that

enables us to monitor, evaluate and

manage the risks we assume in

conducting our day-to-day activities.

These include credit, market, liquidity

and operational risk exposures which

we can define as follows.

The risk of loss arising from the failure

of a client or counter-party to meet

their contractual obligations. At FHM,

credit risk may arise on account of the

following:

?Default risk

?Credit concentration risk

?Recovery risk

?Counter-party risk

?Related-party risk

?Environmental risk

Risk types

Credit risk:

Market risk:

Liquidity and funding risk:

Operational risk:

The risk of loss arising from changes

in market variables such as interest

rates, security prices, equity index

levels, exchange rates, commodity

prices and general credit spreads.

The risk of being unable to either meet

our payment obligations on maturity or

to borrow funds from the market at an

acceptable price to fund actual or

proposed commitments.

The risk of loss arising from

inadequate or failed internal

processes, people and systems, or

the risk of loss resulting from external

causes, whether deliberate,

accidental or natural. Other related

operational risks include:

?Legal risk

?Shariah non-compliance risk

?Reputational risk

?Compliance risk

?Strategic risk


22


Credit risk management

Market risk management

At FHM, market risks may arise in the

following forms:

?Interest rate risk: Interest rate risk

is the exposure of FHM’s financial

condition to adverse movements in

interest rates arising from re-

pricing and/ or maturity

mismatches, changes in

underlying rates and other

characteristics of assets and

liabilities in the normal course of

business.

?Equity price risk: Results from

exposures to changes in prices

and volatility of individual equities,

baskets of equities and equity

indices.

The Company’s Asset Liability

Management Committee (ALCO)

regularly meets to assess prevailing

market risks. ALCO

members analyze the

changes in interest rates

and market conditions

and conduct an analysis

on the asset-liability

maturity gap and product

re-pricing thereby taking

effective measures to

monitor and control

interest rate risks. These

include maintaining of:

?An interest rate risk

management review

process.

?Appropriate limits on

risk taking.

?Adequate systems of

risk measurement.

?A comprehensive

interest rate risk

reporting system and

effective internal

controls.

At present our almost

95% financing portfolio is

linked with floating rate

which review on

quarterly/half yearly basis. This rate

review support for interest rate risk

management in case of volatile rate

in the market. FHM has an adequate

system of internal controls to

ensure the integrity of its

interest rate risk

m a n a g e m e n t

processes and to

promote effective

and efficient

o p e r a t i o n s ,

r e l i a b l e

financial and

r e g u l a t o r y

reporting and

c o m p l i a n c e

with relevant

l a w s ,

regulations and

i n s t i t u t i o n a l

policies.

Liquidity risk management

Asset-liability

management:

Liquidity is of critical importance to

financial institutions. Insufficient

liquidity has been the cause behind

most recent failures of financial

institutions. FHM possesses a

comprehensive and conservative set

of liquidity and funding policies to

address both firm-specific and

broader industry/ market liquidity

events. Our principal objective is to

create a well-capitalized firm with a

strong inherent ability of our core

businesses to continue to generate

revenue, even under adverse

circumstances.

We manage liquidity risks according

to the following principles:

We assess anticipated

holding periods for our

assets and their expected

liquidity in a stressed

environment. We manage

maturities and diversity of our

funding across markets,

products and counter-parties

and seek to maintain

liabilities of appropriate tenor

relative to our asset base.


Integrated risk management

policies

Periodic analysis and of evaluate risk absorption capacity

Strengthen early warning system TO

minimize risk

Performing risk analysis

Implementation on policies

RISK MANAGEMENT FRAME WORK

Thoroughly analyze approved facilities before disbursement.

Assess the risk of financing assets and its marketability.

Assessment of availability of recourse in case of default of counter party.

Measuring the firm’s current and potentialcredit exposure and losses resulting out of

counter-party default.

Reporting of credit exposures to the senior management and Board, risk Mitigates including collateral.

Communication and collaboration with other independent control and support functions such as operations, legal and compliance.

23


Excess liquidity:

We maintain substantially

excess liquidity to meet a

broad range of potential

cash outflows and collateral

needs in a stressed

environment. We invest our

liquid funds in a manner

which emphasizes the need

for security and liquidity.

Liquidity requirements are managed

on a regular basis by the relevant

department which is also responsible

to ensure that sufficient funds are

available to meet short-term

obligations, even in a crisis scenario.

We aim to maintain a sound liquidity

position to meet our liabilities when

due, whether under normal or

stressed conditions.

FHM possesses adequate internal

controls over its liquidity risk

management process. An effective

system has created a strong control

environment with an in-built process of

identifying and evaluating liquidity

risks. It also possesses an adequate

information system that produces

regular independent reports and

evaluations to review adherence with

established policies and procedures.

For effective risk management around

the business and operations we focus

on following areas which support us

towards achieving an appropriate

balance between risk and return.

?Comprehensive and transparent

risk disclosure mechanism to

senior management at all levels.

?Independent control functions

which monitor the effectiveness of

the business’s risk management

capabilities and also oversee risk-

taking activities.

?Monitor and control risk exposures

at level of individual customer at

specific portfolio and at aggregate

firm wide level across all risk type.

During the year we have made

progress and updated by relevant

department under the guidance of

Board of Directors and senior

management for further strengthen

risk management framework.

Risk Management and control

principles

?Improving risk management

approaches and methodologies.

?Refining understanding of key staff

members about risks being faced

in daily operations.

?Refresh and reinforce stress-

testing capabilities and

embedding them across the

operations.

?Strengthen recovery process

through regular review of

customers repayment behavior.

?Regular review of customers

borrowing trend through eCIB.

?Improve Shariah audit mechanism

to minimize risk of Shariah non-

compliance.

?Enhancing staff skills by providing

training on an ongoing basis.

?Strengthening credit risk of

financing portfolio which includes

customer appraisals, assets

valuations and inspections,

analysis of sector and products.

?Upgrade system to provide quick

information obligor’s financial

health and relevant sector.

?Strengthen credit approval, credit

reviews and monitoring functions

and develop early warning

mechanism.


24



Technology is playing an important

role in the working of any business

segment particularly in service

provider institutions. It supports for

sophisticated product development,

better infrastructure, implementation

of reliable techniques for control of

risks and helps the financial

intermediaries to increase outreach in

diversified markets.

To cope with rapidly changing

services needs of the customers, the

management of FHM continuously

focusing on improvement and

upgrading of infrastructure of

Information Technology. Our IT

solutions department playing a

strategic role in capturing, designing

and administering products as well

as enhancing the quality of service

delivery.

During the year FHM has taken

several initiatives for technological

advancement for operational

efficiency, strengthening security

aspects, to provide stable and sound

processing environment and better

coordination within the branches and

main office.

System Support Department (SSD)

continuously engage with end user of

application for further improvement

within the existing system in order to

give speedy and quality service to

customer of FHM. SSD is enhancing

automations in major areas of

business and existing products within

the ERP. Document Management

System is fully implemented which is

now supporting to provide fast and

timely exchange of documents and

correspondences with customers.

This has significantly reduced

physical work load and enhance the

working capacity and quality delivery

of operational staff.

Digitalization of document is another

important task completed by said

department. SSD find user

occasionally busy in paper work

which increases their workload,

overload storage capacity with

cumbersome process of retrieving

information. After digitalization, now

the documents are electronically

available at relevant desk at all

branches with accurate data and

information.

SSD is also working on to further

empower branches to delegate more

rights for better operational working.

However, this will without

compromising of required security

aspects, processes of risk

management and centralized control

and compliances. Further up

gradation of FHM web particularly

enhancement of customer facilitation

area is also in process.

We believe that for innovation and for

business growth, the role of IT is very

vital. The management is fully

cognizant with the importance of

technological advancement and pays

their full attention on this department

as an integral part of business of

FHM.


Orientation

Besides, for new inductee, the orientation always arranged to make them acquainted with set up of organization, its business philosophy and strategic objectives.

Training & Development

Human Resource Development (HRD) is a strategic and comprehensive management area that involves establishing policies, practices, and administrative structures that focus on an organization’s most valuable resource i.e. their people.

The management of FHM is always believe that by investing on human resource for upgrading their professional knowledge support us for enhancement of their professional capacity which ultimately benefit to FHM.

25


Internal Control

A system of effective internal controls

is a critical component for any

organization particularly for financial

institutions. Sound and strong internal

control can help to ensure

that goal and objectivity of

organization will be achieved which

ultimately support for long term

sustainability and profitability. Internal

Control is a process designed to

provide reasonable assurance

regarding the achievement of

objectives of organizations.

The management of FHM is

responsible to establish and maintain

an adequate and effective system of

internal controls and procedures. The

core objectives of internal control are

as follows:

?Effectiveness and efficiency of

operations.

?Reliability of financial reporting.

?Compliance with applicable laws

and regulations.

?Improved reporting throughout the

organization.

Compliance and internal control

functions are well integrated and

entrusted with the responsibilities to

oversee operations and rectifications

of irregularities and control lapses

pointed out through audit reviews.

Concerted efforts are made to

improve the control environment at

every level by continuous review and

streamlining of procedures to prevent

and rectify control lapses. The

department also ensures the

compliance of regulatory requirement,

FHM’s internal policies and

procedures with specific emphasis on

KYC, AML and Shariah audit

mechanism.

The scope of internal audit is

independent function which review

and assess the adequacy and

effectiveness of the control activities

across the FHM as well as to ensure

implementation and compliance with

all the prescribed policies and

procedures.

All significant and material findings of

the internal audit reviews are reported

to the Audit Committee of the Board of

Directors. The Audit Committee

actively monitors implementation to

ensure that identified risks are

mitigated to safeguard the interest of

the institutions.

During the year following control

mechanism further strengthen:

?Audit approach: Risk and system

based further improved

?ERP and integrated control further

increased.

?Documentation management

application introduced which

enhanced error free working.

This has further enhanced

compliance and control environment

including quality of human resource

and operational working.

Internal control activities are ongoing

process that includes identification,

evaluation and management of

significant risks faced by FHM.

However, function of said segment is

continuously improving and

strengthening in line with required

regulatory compliance and best

business practices.


The Process of

Internal Control

RiskAssessment

Control Environment

Control Activities

Information & Communication

Monitoring

26


Shariah Compliance and Audit

Mechanism

The Board of Directors and Audit

Committee

Alhamdulillah, more than two years

have been passed since the issuance

of guidelines of Shariah Compliance

and Audit Mechanism. Our Shariah

compliance department is not only

fully functional but the operations of

the department are continuously

improving under the supervision and

guidance of Shariah Advisor. The

Shariah compliance and governance

are monitored through:

1. Surprise audit

2. On job training

3. Conducting in house

workshops

Within the HR training, the training

and learning of Islamic finance is the

main area of overall learning of staff

members. The training focus always

remains on enhancement of Islamic

Finance knowledge. The management

of FHM is fully committed for Shariah

governance and Shariah compliance

culture within the Modaraba. Strong

and effective Shariah governance and

compliance culture within the

Modaraba is the prime objective of

FHM. A complete Shariah Audit report

of Shariah Advisor for the period

ended 30th June, 2014, is also

attached along with this report.

The following changes have taken

place within Board of Directors of the

Habib Modaraba Management (Pvt.)

Limited (the Company), the

management company of First Habib

Modaraba since the Directors’ report

for the year ended June 30, 2013.

?Due to sad demise of Mr. Wazir

Husain Jafree, Mr. Syed Rasheed

Akhtar was appointed in his place,

on April 02, 2014.

?Two new directors have been

appointed within board i.e. Mr.

Mohammad Haroon Ahmed and

Mr. Mohammed Hashim.

?The new directors are having very

diversified and rich experience of

financial local and international

market particularly Islamic

banking, trade finance and

investment banking. The boards

welcome all new directors and

hopeful that FHM will be greatly

benefited with professional

experience and expertise of newly

inducted directors.

?Consequent upon the expiry of the

term of directors of the Company,

fresh elections were held on May

30, 2014. Accordingly, six persons

have been duly elected /

re-elected as the directors whose

consent were received by the

Management Company namely

Mr. Wazir Mumtaz Ahmed,

Mr. Muhammad Shoaib Ibrahim,

Mr. Abbas Ali Muhammad,

Mr. Syed Rasheed Akhtar,

Mr. Mohammad Haroon Ahmed

and Mr. Mohammed Hashim.

?In order to comply with new Code

of Corporate Governance,

Mr. Syed Rasheed Akhtar has also

been appointed as Chairman Audit

Committee within the capacity of

Independent Director within the

board.

In order to comply with Code of

Corporate Governance, Mr.

Muhammad Shoaib Ibrahim, CEO has

attended directors training program

arranged by Institutes of Chartered

Accountant of Pakistan (ICAP). Mr.

Directors training & Orientation

Shoaib successfully attended the both

training session and qualified as

“Certified Director” from ICAP. We are

planning to send our other member of

board for directors program in current

year as well.

For new directors, an orientation is

arranged to make them acquainted

with the set up of FHM, its business

philosophy and strategic objectives.

During the year, all board meetings

have been arranged at Karachi in

Management Company’s office and

none of the meeting conducted

outside Pakistan in order to avoid any

extra expenses of outside meeting.

A Statement showing pattern of

Certificate Holding of the Modaraba

and additional information as at June

30, 2014 is included in this report. The

Directors, CEO, CFO, Company

Secretary and their spouses and

minor children did not carry out any

transaction in the certificates of the

Modaraba during the year except

those reported.

The value of investments of provident

fund and gratuity based on audited

accounts as at December 31, 2013

are Rs. 35.641 million and Rs. 17.448

million respectively.

Four meetings of Board of Directors

were held during the year, attendance

by each director is appended

hereunder.

Board Meeting Outside Pakistan

Pattern of Certificate Holders

Provident Fund and Gratuity

Attendance of Board meetings


27



Name of Directors Number of meetings attended

Auditors

Conclusion

Acknowledgment

Mr. Wazir Mumtaz Ahmed 4

Mr. Muhammad Shoaib Ibrahim 4

Mr. Abbas Ali Muhammad 4

Mr. Wazir Husain Jafree (Late) 2

Mr. Syed Rasheed Akhtar 1

Mr. Mohammad Haroon Ahmed 1

Present auditors M/s Muniff Ziauddin

& Co. Chartered Accountant, are

being eligible to offer themselves for

reappointment as auditors for the

financial year ending June 30, 2015.

However their appointment will be

subject to approval from Registrar

Modaraba Office.

Looking ahead, in 2014-15 we will

strive to enhance market outreach

and add quality assets through sound

customer based portfolio. While cost

efficiencies remain a priority, we will

continue to invest, as always, in

people and technology. FHM remains

determined in maintaining its status as

leading Modaraba. Under the

prevailing circumstances we

remained committed to our strategy of

steady growth.

The Board would like to express its

sincere thanks and gratitude for the

continued support and guidance

provided by Securities & Exchange

Commission of Pakistan, Registrar of

Modaraba Companies, Financial

Institutions and State Bank of Pakistan

from time to time, customers of the

Modaraba for their patronage and

business, Certificate holders who

have remained committed to FHM.

In the end, the Board appreciates

dedication, high level of

professionalism and hard work of

employees of your Modaraba for

achieving excellent results.

On behalf of the Board of Directors

Muhammad Shoaib IbrahimChief Executive Officer

Karachi: July 23, 2014

28


Liquidity Risk Management Process

Liquidity refers to the ability of an institution to meet demands for funds. Liquidity management

means ensuring that the institution maintains sufficient cash and liquid assets i.e.

¬To satisfy client demand for credit facility and deposits withdrawals, and

¬To pay the institution’s expenses.

FHM’s liquidity risk governance structure is modelled in such a way so as to ensure that its liquidity

p o s i t i o n i s

optimized to

support business

requirements and

support for deposit

withdrawal. The

Assets Liability

M a n a g e m e n t

Committee (ALCO)

plays a vital role

for l iquidi ty

m a n a g e m e n t .

ALCO meets

regularly and make sure that sound liquidity are in placed while going through with maturity profile

both financing and deposit side and ensure the availability of sufficient surplus funds for

unanticipated contingencies.

As per direction of ALCO, the treasury department keeps sizeable funds with banks to meet any

eventuality. As a liquidity management strategy, FHM has been keeping good amount in GOP Ijara

Sukuk which is sovereign and also carrying good profit return.

FHM’s day-to-day liquidity management process is initiated by the Treasury Division which is

entrusted to monitor and manage the daily liquidity requirement based on forecasts of cash flow

analysis for short and medium tenors. Treasury is also responsible for maintaining contingency

funding arrangements with banks to meet possible unexpected out flows. Treasury Division also

compiles a monthly liquidity gap report to the Securities & Exchange Commission of Pakistan,

Registrar Modaraba Office.

29


Strategic Key Performance Indicators

FHM over the years has shown resilience and stable

performance within the Modaraba sector in most Key

Performance Indicator. During the year overall performance

of the entire financial sector remained under pressure due

to challenging operating environment with high level of

competition and economic uncertainties. However, under

these challenging conditions, the performance of FHM

remained satisfactory. The profitability has been maintained

despite of reduction of discount rate by the SBP during the

year 2013-14 and increase of cost of business due to

inflationary pressure within the economy.

The strategic key performance indicators during the year

were as follows:

¬13% growth in financing assets

¬52% growth in Certificate of Musharaka (deposits)

¬41% growth in Diminishing Musharaka financing

¬14% growth in Balance Sheet size

¬10% increase in dividend payment

Core Strategic Drives Objective Progress

Drive to maintain profitability while coping up with the operational challenges.

Sustained profitabilityProfitability has been maintained despite difficult operating environment

Drive to give best return to Modaraba Certificate holders

Sound and stable return to investor

Cash dividend of 22% has been declared

Concentrate on other financing product segment

Product diversification41% enhancement has been made in Diminishing Musharaka financing

Increase client base and financing size

Enhancement of business volume and profitability

During the year 13% growth has been made in financing assets.

Diversified and sustainable deposit base

Leveraging through low cost funds

Certificate of Musharaka(COM) has been increased to 52% which greatly supported to assets financing.

Prudent and cautious lending approach

Sound lending portfolio and good assets quality

Satisfactory recovery. No provision was made for doubtful or bad debts.

Strategies to be followed to further strengthen key performance indicators in 2014-15

¬Capture a larger portion of the market opportunities

¬Add new good customers within the portfolio.

¬Expand market outreach through opening new locations.

¬Concentrate on products as diversification.

¬Enhance size of retail deposit base from medium to long term for good quality lending.

¬Enhance size of investment in sound, stable and dividend paying Shariah compliant listed securities

along with Sukuk and Musharkah based TFCs.

30


Business Continuity Plan (BCP)Disaster Recovery Planning (DRP)

Business Continuity Plan (BCP)

Disaster Recovery Plan (DRP)

Business Continuity Planning is best described as the

processes and procedures that are carried out by an

organization to ensure that any type of business functions

continue to operate if there is any operational disaster or

force majeure. BCP planning enables us to re-organize any

disconnected operational services as quickly as possible. It

covers our all critical operational processes and

procedures.

DRP is the process which uses to recover software, data or

application in any distress situations caused due to human

error or through any natural disaster. DR plan is integrated

to a large extent with BCP and designated key members are

familiar with the specific actions they will need to take in

case of any disaster. At FHM, our DR plan is adaptable and

regularly update with the backup. Our relevant department

also does the mock exercise at allocated DR sites to ensure

the immediate recovery of data and back to normal

operations whenever it is needed.

At FHM the board every year reviews BCP and DR plan in

order to protect the business functions, assets and

employees. Contingency plans for core services, key

systems and priority business processes revisit as part of

existing management processes to ensure that continuity

plans remain relevant. These plans provide each business

unit with the necessary guidelines and procedures in case

of an emergency. Continuous updates of these plans are

performed annually, to ensure that they are kept up to date

with changes in systems and business units.

Our relevant department has taken following measures to

ensure the quickly and smooth availability of PCB/DR.

FHM arranged third Party BCP/DR solution from M/s. ðCube XS Weatherly (Pvt) Ltd.

¬200 GB Data Storage for daily update of FHM Data

with encryption and secured Layer

¬Two BCP Seats at Cube XS Premises

Repeatedly perform BCP MOCK Exercise. The ðobjectives of the MOCK exercise are as follows:

¬Demonstrate viability of the Business Continuity Plan

by applying well defined and relevant disruption

scenarios that may highlight discrepancies or

inconsistencies.

¬Use the results of the MOCK exercise to update and

improve the plan.

¬Educate the responsible persons on the workings of

the plan.

Store saved data in Bank’s Locker at Karachi & Lahore ðon monthly basis.

For the recovery of critical IT systems and services in a ðfallback situation, FHM has created environment at

laptops with full equipped devices for restoring IT

systems and data from backups or archives.

31


Disbursement by asset category

For The Year 2013-14

79%

4%

17%

VehiclesGeneratorsPlant & Machinery

-

500

1,000

1,500

2,000

2,500

2014 2013

Financing During The Year

D.M.

Ijarah

Financing

Rs.

in M

illio

n

1800

1600

1400

1200

1000

800

600

400

200

0

Certificate of Musharakah

20132014

Rs.

in M

illio

n

Segment-wise Review

Financing

Assets category and sector

Certificate of Musharkah

¬Ijara (Leasing)

Ijarah financing of Rs.1,402.0 were made out of total

financing of Rs.2,302.0 million as compared to

financing of Rs.2,254 last year. Within disbursement,

leading sector of disbursement was targeted such

as Pharmaceuticals, Services, Food & Allied and

Chemicals.

¬Diminishing Musharkah

Financing in Diminishing Musharkah of Rs.900.0

was made as compare to Rs.364.0 of last year.

Keeping in view of our strategy on product

diversification, we have been continuously

concentrating on this financing product.

Disbursement in this segment was 41% of total

financing as compared to 16% of last year.

Our branches outside Karachi, i.e. Lahore,

Islamabad and Multan have made significant

contribution in assets booking as compared

corresponding period of last year and they made

significant contribution in overall disbursement.

Moreover, good new corporate customers had also

been added by these branches which have

supported to further enhance business volume in

their respective areas.

Major portion of financing remain within the assets category

of motor vehicle i.e. 76% of total financing and rest of

financing was made within the assets of generator set,

machinery and equipment. The leading sector of

disbursement were targeted such as Pharmaceuticals,

Services, Food & Allied and Chemicals which were around

50% of total financing.

On liability side, good growth within the Certificate of

Musharkah (COM) has also been made. The outstanding

amount under COM was Rs.1,533.0 million at the end of

year as compared to Rs.1,007.0 million of corresponding

period of last year, grew by 52%. Our all branches

particularly Karachi branch have made their good efforts in

channelizing deposit under COM which has greatly

supported for generation of business volume at desire level.

¬

¬

¬

32


Energy Saving Measures

Energy conservation is vital for environment, First Habib Modaraba (FHM) having the

vision to demonstrate this thorough practical application within organization. The

Management of FHM always encourage for the betterment of the environment and

effective implementation of polices so that benefit of energy conservation can be

achieved.

The undermentioned measures have been initiated at FHM

¬Efficient use of electricity through use of energy savers.

¬Use of energy efficient hardware such as laptops etc.

¬Economical use of water

¬Economical use of air conditioners

The management is committed toward the pollution free environment through

efficient consumption of energy and other resource. The awareness of staff members

are regularly enhance through various dialogue, discussion and training sessions.

Quality Assurance

High quality customer service is an integral part of FHM's

philosophy. It is our constant endeavor to provide greater

services with wider accessibility.

Our corporate slogan is “Customer First”. We always

emphasis to provide best quality services to our customers.

We continuously develop and improve customer-service

oriented culture within FHM.

Knowing our customer and their need are the key to our

business success. We also feel that well updated IT

infrastructure is also one of the most important tool to

provide best services to customers. FHM is continuously up

grading its IT infrastructure in line with modern technology in

order to have efficient operations and speedy services to

customers.

We judge our quality by:

¬Regular visits of Senior Executives to customers to

get their feedbacks.

¬Mystery calls are made to marketing staff to

check the behavior and response time.

¬Feedback form has been kept on website.

¬Keep on minimize proposal turnover time.

33


SustainabilityCorporate Social Responsibility

Corporate social Responsibility (CSR) is undertaking the

role of “Corporate Citizen”. It ensures that business values

and policies are align In such a way to balance between

improving and developing the wealth of business and

contributing for betterment of society in an effective

manner.

FHM, being a socially responsible corporate entity, has

been a regular contributor to the society and communities.

It has been our primary concern to ensure that contributing

to community development should be continuously carried

out. Since last several years FHM has been donating non-

profit organization working for improvement educations,

healthcare etc. FHM continues to encourage events and

projects which focus on children, health and education in

under privileged members of society.

FHM having the ambition to serve the community with great

professionalism and zeal has been always emphasizing on

following areas for better environment and sustainability.

1. Encourage staff members for avoiding of

unnecessary wastage of resources such as

excessive consumption of energy and paper

printing etc.

2. Motivate staff members for participation in activities

which are beneficial for better environment at

large.

3. Contribution on social community projects by staff

members which are indeed a catalyst for any good

corporate institution.

4. In order to keep customers’ interest safe, FHM,

from time to time address their grievances through

their feedback and regular visits.

5. FHM encourage equal opportunity employment

without any discrimination whether it is gender or

any disability, we believe that every human mind

having talent which can be benefitted to the

institutions.

6. Health and safety always remain an utmost

concern of the management of FHM.

Within the HR policy, the staffs of FHM are covered

under health and group life insurance policies with

renowned insurance companies.

7. Strong internal controls are the one of the main

corporate objectives. FHM promote sound ethical

practices within the staff members with Risk &

Reward concept.

We must say that FHM is continuously striving for better

prosperity of people, society and other stakeholders. It is

our aim to create more value for prosperity of the society

and nation.

Encourage staff members for avoiding of unnecessary

wastage of resources such as excessive consumption of

energy etc.

Energy conservation

34


Customer protection measures

Environment protection measures

Our relationships with our customers depend upon trust. To

retain this trust we must set our customers’ interest first while

ensuring that all our customers are treated fairly according

to the highest standards of service, transparency and

responsible practices. We conduct our business in an

ethical way guided by our core values of mutual respect,

professionalism and commitment. Customer protection is an

essential element of any financial system. It is not only

important to protect existing customers but it also helps to

boost confidence within the financial system for potential

customer of future as well.

FHM is always committed to give best and secured services

to its customers. Confidentiality and non-disclosure of the

customer data is one of the strict guideline given by the

management to the staff. The IT department has secured

the data by using following techniques:

¬Only allow authorize staff access to the information

required by them in order to discharge their day to

day job responsibilities.

¬Encrypt any personal information held electronically

that would cause damage or distress if it were lost or

stolen.

¬Securely remove all personal information before

disposing of old computers (by using technology or

destroying the hard disk).

It is our corporate objective to consume minimum natural

resources and create low emission and waste. We also

discourage those customers whose businesses are not

environment friendly. FHM conscious on negative effect of

waste and initiated following measures to minimize use of

paper.

¬Electronic documents managements system

introduced to minimize printing of papers.

¬Customers’ correspondences being sent via e-mails.

¬Web based communication system has been

started to communicate with customers and other

stakeholders.

¬Constantly raise staff awareness for paperless office

concept and discourage unnecessary printing of

documents.

Business ethics and anti-corruption measures

We believe that in financial institutions the ethics of

employees play a very vital part for institutional reputation

and sustainable development. Similarly the ethical

boundaries are also utmost important for our other

stakeholders such as supplier, customer, investors and

certificate holders.

FHM’s Code of Ethics spells out the expected standards of

behavior and sets the operating principles to be followed.

Our Code of Ethics requires that it is necessary to ensure

that the standards of behavior expected from Management

and employees are followed to the letter and spirit. In this

connection, FHM’s Code of Ethics clearly stipulates the

expected standard of behavior and the “Do’s” and “Don’ts”

the employees must observe. Further, the Code provides

guidance on identification, follow up action and reporting of

malpractices, if any.

At FHM we are fully committed to comply with local laws

and regulations as well as applying a strict code of conduct

to all employees. FHM convinced that ethical management

is not only a support for effective responding to the rapid

change to overall business environment but also a strong

channel for building trust with its various segments of

society.

For sustainable development and performance, we have

developed following professional Code of Ethics which

adhered and implemented at all levels. These principles

have been guiding through our own practices

¬Comply with all applicable laws and regulations

¬Comply with Shariah governance

¬Be fair with investor and customer

¬Give transparent and timely information to our

investors.

¬Maintain confidentiality of customers’ information.

¬Do not encourage anti-environmental activities.

¬Do not engage in speculative activities.

35

Through continuous learning we

adapt the change and keep on

strengthening our position for

best performance and deliver

even better results with each

passing year.

We Learn

We Adapt

We Perform

We Deliver

36

Delivering 29 Years of unbroken dividend payout

Average Dividend Payment 17.50% per year

20%

21%21%

20%

21%

20%

15%

10%

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20%

23%23%

20%

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10%

11%

13%13%

13%

15%

20%

15%

18%

20%

22%

1985-86

1986-87

1987-88

1988-89

1989-90

1990-91

1991-92

1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

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2010-11

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37


KEY FINANCIAL DATA 2014 2013 2012 2011 2010 2009

Key Financial Data Of Six Years At A Glance

STAKEHOLDER INFORMATION 2014 2013 2012 2011 2010 2009

---------------------------------- Rupees in Million ----------------------------------

Profitability RatiosProfit after tax ratio (%) 17.80 64.81 23.80 19.34 19.83 14.62 Gross yield on earning assets (%) 32.69 34.15 33.22 37.26 38.08 56.50 Gross spread ratio (%) 10.06 2.42 12.11 12.96 12.88 9.35 Cost / Income ratio (%) 81.27 54.56 76.35 79.80 79.40 84.57 Return on equity (%) 9.21 32.92 15.52 13.22 13.13 12.36 Return on assets (%) 5.29 21.04 7.57 6.82 7.08 7.42 Return on capital employed (%) 9.69 34.61 12.11 10.03 10.78 11.82 Gross profit ratio (%) 22.66 14.71 23.37 22.65 22.02 20.25 Net profit to sale (%) 17.80 64.81 23.80 19.34 19.83 14.62 EBITDA margin to sale (%) 25.00 79.58 31.48 25.87 26.74 22.09 Income / Expense ratio 1.14 1.13 1.17 1.18 1.18 1.12

Liquidity RatiosAdvance to deposit ratio 2.56 3.46 2.97 4.25 4.86 6.07 Current ratio 1.00 1.00 1.48 1.87 1.79 2.20 Cash to current liabilities (%) 20.00 9.00 10.00 20.00 29.00 57.00Cashflow from operations to sale (%) -11.00 -21.00 2.00 9.00 8.00 48.00

Turnover ratioTotal Asset Turnover Ratio (%) 32.03 52.71 35.51 37.52 38.18 53.46 Fixed Asset Turnover Ratio (%) 49.37 75.05 59.02 60.11 58.27 82.83

Investment / Market ratioMarket Value Per Share 9.75 9.90 7.70 8.15 6.70 5.77 High 10.81 9.90 9.34 8.19 7.33 7.85 Low 8.50 7.10 6.30 5.66 5.50 4.37 EPS (Earning per share) 1.42 4.92 1.71 1.38 1.33 1.21 Price earning ratio 6.87 2.01 4.50 5.91 5.04 4.77 Price to book ratio 0.63 0.66 0.70 0.78 0.66 0.59 Dividend Yield ratio (%) 11.28 10.10 12.99 13.50 15.67 17.33Dividend Payout ratio (%) 77.69 20.31 58.36 79.78 79.16 82.75 Dividend cover ratio 1.29 4.92 1.71 1.25 1.27 1.21 Cash dividend (%) 22.00 20.00 20.00 22.00 21.00 20.00Cash dividend per share 1.10 1.00 1.00 1.10 1.05 1.00 Book Value Per Share 15.38 14.96 11.04 10.43 10.10 9.78 Dividend (in million rupees) 222.00 202.00 202.00 222.00 212.00 202.00 Profit Growth Ratio (%) [YoY] -71.00 187.00 24.00 4.00 10.00 -9.00Profit Growth Ratio (%) [base year 2009] 17.00 308.00 42.00 14.00 10.00 -

Capital Structure ratioNet assets per share 15.92 15.14 15.51 15.18 14.35 12.99 Earning asset to total asset ratio (%) 90.95 95.05 95.71 94.66 93.76 89.88

Total Assets 5,392.99 4,719.29 4,565.42 4,075.21 3,777.83 3,281.20 Ijarah Assets 2,868.62 2,941.64 2,501.15 2,372.96 2,435.30 2,096.89 Ijarah Disbursement 1,400.90 1,889.71 1,465.28 1,226.65 1,512.37 1,150.74 Current Assets 1,893.90 1,404.85 1,818.51 1,531.47 1,302.28 1,163.36 Current Liabilities 1,894.27 1,401.51 1,229.15 820.81 728.55 527.70 Total Liabilities 2,184.38 1,666.44 1,438.22 1,015.59 885.69 663.05 Paid-up Capital 1,008.00 1,008.00 1,008.00 1,008.00 1,008.00 1,008.00 Reserves 2,200.62 2,044.84 2,119.20 2,051.62 1,884.20 1,610.15 Certificate Holders' Equity 3,208.62 3,052.84 3,127.20 3,059.62 2,892.20 2,618.15 Gross Revenue 1,603.47 1,531.86 1,451.50 1,437.27 1,348.64 1,666.23 Net Profit 285.44 992.80 345.43 277.95 267.42 243.61 Earning Per Certificate - Rs.5/- each 1.42 4.92 1.71 1.38 1.33 1.21 Cash Dividend (%) 22.00 20.00 20.00 22.00 21.00 20.00 Ijarah Rental 297.92 316.68 333.39 327.34 311.18 351.55

38


Net Cash flow from operating activities

Net Cash flow from investing activities

Net Cash flow from financing activities

Summary Of Cash Flow

---------------------------------- Rupees in Million ----------------------------------

Cash & cash equivalents at the beginning of the year 131 122 112 212 302 150

Net Cash flow from operating activities (183) (325) 25 130 (102) 805

Net Cash flow from investing activities 97 495 (150) (118) 47 17

Net Cash flow from financing activities 326 (161) 136 (112) (34) (670)

Net increase/decrease in cash & cash equivalent 240 8 11 (101) (90) 152

Cash & cash equivalents at the end of the year 371 131 122 112 212 302

2014 2013 2012 2011 2010 2009

RU

PE

ES

I

N

MI

LL

IO

NS

Cash flow at a glance

(800)

(600)

(400)

(200)

-

200

400

600

800

1,000

`09 `10 `11 `12 `13 `14

39


Graphical Presentation of Financial Summary R

UPEES

IN

MIL

LIO

NS

4000

3500

3000

2500

2000

1500

1000

500

0

`14`13

`12`11

`10`09

EQUITY

RU

PEES

IN

MIL

LIO

NS

4000

3500

3000

2500

2000

1500

1000

500

0

`14`13

`12`11

`10`09

FINANCING ASSETS

RU

PEES

IN

MIL

LIO

NS

6000

5000

4000

3000

2000

1000

0

`14`13

`12`11

`10`09

TOTAL ASSETS

20

15

10

5

0

`14`13

`12`11

`10`09

Dividend Yield

%

16

14

12

10

8

6

4

2

0

Market Value Vs Book Value per Modaraba Certificate

Market Value Per Modaraba Certificate Book Value Per Modaraba Certificate

`14`13

`12`11

`10`09

Years

Years

Years

Years

Years

PER

CEN

TAG

E (%

)

PER

CEN

TAG

E (%

)

40


2014

ASSETS

2014

Equity & Liabilities

Balance Sheet Composition

5%

35%

60%

5%

30%

65%

Certificate Holder Equity

Current LiabilitiesNon-Current Liabilities

2013

2013

Long Term Assets

Current AssetsFixed Assets

5%

40%

55%

7%

30%

63%

Long Term Assets

Current AssetsFixed Assets

Certificate Holder Equity

Current LiabilitiesNon-Current Liabilities

41


Horizontal Analysis

ASSETSNON-CURRENT ASSETSFixed Assets - tangible

Ijarah Assets (2.48) 17.61 5.40 (2.56) 16.14 (22.80)Assets in own use (16.56) 67.03 43.47 (11.49) (7.31) (9.92)Intangible Assets 6.50 (33.70) 2,131.66 36.01 451.60 (61.52)Investment in diminishing musharaka 73.45 51.86 44.26 402.48 130.15 0.00 Long-term advances & deposits (51.86) 64.33 (46.53) 81.85 1,850.00 (93.39)

CURRENT ASSETSInvestments (2.20) (32.90) 18.75 20.70 25.36 (26.54)Current maturity of diminishing musharaka 132.32 28.97 108.69 88.27 236.42 0.00 Short-term Murabaha finance 0.00 0.00 0.00 0.00 0.00 0.00 Ijarah rental receivable - secured, considered good 181.66 3.01 (20.58) (9.27) (58.27) 254.31 Loan & advances - - - - - (100.00)Trade deposits & short-term prepayments (25.29) 122.33 3.12 195.36 154.68 (33.11)Other receivables 61.65 32.69 19.07 158.54 (26.62) (41.51)Tax refund due from Government (17.38) 33.48 63.08 1,642.05 0.00 0.00 Cash & bank balances 184.09 6.74 (24.23) (23.93) (29.72) 101.14

TOTAL ASSETS 14.28 3.37 12.03 7.87 15.14 (18.49)

EQUITY & LIABILITIESCAPITAL & RESERVES

Authorized Certificate capital 0.00 0.00 0.00 0.00 0.00 0.00 Issued, subscribed & paid-up capital 0.00 0.00 0.00 0.00 0.00 0.00 Reserves 7.62 (3.51) 3.29 8.89 17.02 (12.44)

Certificate holders' equity 5.10 (2.38) 2.21 5.79 10.47 (8.03)

NON-CURRENT LIABILITIESLong-term Murabaha finances - - - (100.00)Certificates of Musharaka - unsecured - - (100.00) 347.51 (89.48) (85.21)Security deposits against Ijarah assets 9.50 26.72 9.02 22.56 21.31 (31.54)

CURRENT LIABILITIESMurabaha finances - current portion - - - - - (100.00)Certificates of Musharaka - current portion 52.18 3.97 58.82 18.59 49.83 5.92 Security deposits - current portion 48.36 (5.52) 18.86 (44.79) (4.58) 33.15 Unearned Ijarah rentals (85.40) 55.73 77.03 (36.97) 107.22 264.87 Advance Ijarah rentals received 63.97 5.87 (9.18) (5.59) 3.74 (9.22)Trade & other payables (19.10) 86.96 29.64 61.11 43.67 (32.61)Taxation - net 0.00 0.00 0.00 0.00 653.27 (70.83)Unclaimed profit distribution 10.19 8.56 9.33 7.39 11.67 12.25 TOTAL EQUITY & LIABILITIES 14.28 3.37 12.03 7.87 15.14 (18.49)

Ijarah rentals 1.83 5.46 (0.87) 5.67 (19.27) (0.25)Profit on diminishing musharaka 90.36 8.01 140.30 192.82 78.48 0.00

Depreciation on Ijarah assets 3.94 8.71 (1.69) 5.82 (21.36) (2.85)Administrative expenses 3.82 17.73 3.90 16.51 3.66 13.11 Other Income (87.01) 463.15 85.14 (2.24) 6.72 (50.62)Other charges (72.28) 34.44 115.07 (53.49) (69.49) 14,932.29 Financial charges 11.97 11.73 38.63 30.13 (32.21) (51.73)

Modaraba company's management fee (71.35) 203.09 22.90 3.93 9.77 (9.39)Profit for the year (71.17) 187.28 24.29 3.93 9.77 (9.39)

PROFIT & LOSS ACCOUNT (%) 2013 2013 2012 2011 2010 2009

BALACNE SHEET (%) 2014 2013 2012 2011 2010 2009

42


Vertical Analysis

ASSETSNON-CURRENT ASSETSFixed Assets - tangible

Ijarah Assets 53.19 62.33 54.78 58.23 64.46 63.91 Assets in own use 0.21 0.28 0.18 0.14 0.17 0.21 Intangible Assets 0.0278 0.0299 0.0466 0.0023 0.0019 0.0004 Investment in diminishing musharaka 11.43 7.53 5.13 3.98 0.85 0.43 Long-term advances & deposits 0.02 0.05 0.03 0.07 0.04 0.43

CURRENT ASSETSInvestments 18.08 21.13 32.55 30.71 27.44 25.20 Current maturity of diminishing musharaka 8.24 4.05 3.25 1.74 1.00 0.34 Ijarah rental receivable - secured, considered good 0.18 0.07 0.07 0.11 0.13 0.35 Trade deposits & short-term prepayments 0.16 0.24 0.11 0.12 0.04 0.02 Other receivables 0.99 0.70 0.54 0.51 0.21 0.34 Tax refund due from Government 0.58 0.80 0.62 0.43 0.03 0.00

Cash & bank balances 6.88 2.77 2.68 3.96 5.62 9.21 TOTAL ASSETS 100.00 100.00 100.00 100.00 100.00 100.00

EQUITY & LIABILITIESCAPITAL & RESERVES

Authorized Certificate capital 20.40 23.31 24.09 26.99 29.12 33.52 Issued, subscribed & paid-up capital 18.69 21.36 22.08 24.73 26.68 30.72 Reserves 40.81 43.33 46.42 50.34 49.87 49.07

Certificate holders' equity 59.50 64.69 68.50 75.08 76.56 79.79

NON-CURRENT LIABILITIESCertificates of Musharaka - unsecured - - - 0.07 0.02 0.19 Security deposits against Ijarah assets 5.38 5.61 4.58 4.71 4.14 3.93 Total Non-Current Liabilities 5.38 5.61 4.58 4.78 4.16 4.13

CURRENT LIABILITIESCertificates of Musharaka - current portion 28.44 21.36 21.23 14.98 13.62 10.47 Security deposits - current portion 1.50 1.16 1.27 1.19 2.33 2.82 Unearned Ijarah rentals 0.07 0.58 0.38 0.24 0.42 0.23 Advance Ijarah rentals received 0.60 0.42 0.41 0.51 0.58 0.64 Trade & other payables 4.01 5.67 3.14 2.71 1.81 1.45 Taxation - net 0.05 0.059 0.061 0.068 0.074 0.011 Unclaimed profit distribution 0.44 0.46 0.43 0.44 0.45 0.46 Total Current Liabilities 35.12 29.70 26.92 20.14 19.28 16.08

TOTAL EQUITY & LIABILITIES 100.00 100.00 100.00 100.00 100.00 100.00

Ijarah rentals 94.16 96.79 96.86 98.68 99.52 99.78 Profit on diminishing musharaka 5.84 3.21 3.14 1.32 0.48 0.22

100.00 100.00 100.00 100.00 100.00 100.00 Depreciation on Ijarah assets 80.27 78.64 76.29 76.92 76.82 78.86 Administrative expenses 4.69 4.60 4.12 3.93 3.56 2.77 Other Income 8.22 64.46 12.07 6.46 6.99 5.29 Other charges 0.39 1.42 1.11 0.51 1.16 3.08 Financial charges 7.60 6.91 6.52 4.67 3.79 4.51

Modaraba company's management fee 2.18 7.76 2.70 2.18 2.21 1.63

Profit for the year 18.95 66.93 24.57 19.60 19.92 14.65

PROFIT & LOSS ACCOUNT (%) 2014 2013 2012 2011 2010 2009

BALACNE SHEET (%) 2014 2013 2012 2011 2010 2009

43



Profitability Ratios:

Liquidity Ratios:

Activity / Turnover Ratios:

Investment / Market Ratios:

¬Gross profit ratio is 22.6% is slightly improved as compared to last year.

¬The profit after tax ratio is 17.80% as compared to 64.81% in prior year due to the realized gain on sale of listed securities in 2012-13.

¬Net profit to sales ratio decreased to 17.8% in 2014 from 64.81% in 2013 is mainly due to the reason mentioned above.

¬Gross yield to earning ratio is maintained.

¬Cost to income ratio is 81% which is maintained as compared to previous years.

¬Return on equity is slightly lower than last year because of building up of reserves.

¬Gross spread ratio is slightly lower than the previous years except for last year.

¬Return on capital employed is also lower than previous years because of building up of reserves.

¬EBITDA margin to sale has been in between 22% to 34% except for last year because of realized gain on disinvestment of securities.

¬Income to expense ratio has been maintained.

¬Cash to current liabilities is 20% in 2014, as compared to 9% in prior year is mainly due to improved working capital management.

¬Advance to deposit ratio slightly reduced because of building of deposits.

¬Current ratio has been maintained.

¬Cash flow from operations has been slightly on negative side. This is due to the limitation of presenting cash generated from deposit i.e. certificate of Musharaka in operating activities by IFRS.

¬Total asset turnover ratio is 32.03% in 2014 as compared to 52.71% in prior year is mainly due to the sale of listed securities in previous year.

¬Earning assets to total assets is slightly decreased from 98% to 95%.

¬Net assets per share have been consistently maintained.

¬EPS has been remained in between Rs.1.30 to Rs.1.70 in last seven years except in 2013 where EPS was increased due to onetime gain on sale of capital market securities.

¬P/E ratio increased from 2.01 to 6.87 in 2014 mainly due to the decrease in earning price per share from 4.92 to 1.42 in 2013.

¬Dividend yield increased to 11.28% in 2014 from 10.10% is mainly due to increased profit from operations.

¬Book value per share has increased from Rs.14.96 to Rs.15.38 in 2014 due to the increased in equity.

¬Dividend payout ratio has increased from 20.31 to 77.69.

¬Cash dividend per Modaraba certificate has also increased from 20% to 22%.

¬Market value per certificate of Modaraba has been consistently maintained.

¬No abnormal variation in the market price of Modaraba certificates over the period of six years.

¬Dividend cover ratio has been in between 1.21 to 1.71 over the period of six years except for last year due to sale of investments in capital market.

¬Dividend per Modaraba Certificate has been improved from 1.0 to 1.10 as compared to last year.

44



RATIO

PRICE EARNING RATIO

Years

1.5

2.5

3.5

4.5

5.5

6.5

0.5

2009 2010 2011 2012 2013 2014

RU

PEES

DIVIDEND PER CERTIFICATE

0.86

0.98

1.1

0.5

0.62

0.74

2009 2010 2011 2012 2013 2014Years

RU

PEES

NET ASSET PER CERTIFICATE

Years

14

18

10

2009 2010 2011 2012 2013 2014

RU

PEES

MARKET VALUE PER CERTIFICATE

Years

10

11

5

6

7

8

9

2009 2010 2011 2012 2013 2014

RATIO

PRICE BOOK RATIO

Years

0.7

0.8

0.9

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

2009 2010 2011 2012 2013 2014

45


Value Added Statement

Rupees (%) (%)

Value Added

Revenue from operations 391,507,973 365,849,805Other income / charges 117,674,293 934,776,929Value added by financial services 509,182,266 1,300,626,734

Operating expense 28,778,545 20,843,358480,403,721 100.00 1,279,783,376 100.00

Value Allocated

To EmployeesSalaries, allowances & other benefits 40,712,407 8.85 41,183,558 3.22

To provider of financeAs profit on Certificate of Musharaka 114,767,714 24.95 102,499,415 8.01

To ModaribAs management company remuneration 32,948,960 7.16 115,726,134 9.04

To certificate holdersProfit on certificates 221,760,000 43.83 201,600,000 15.75

To SocietyDonation 840,000 0.18 961,857 0.08

To expansion & growthAs Depreciation 5,691,211 1.24 5,157,446 0.40As Reserve and Retained earning 63,683,429 13.79 812,654,966 63.50

480,403,721 100.00 1,279,783,376 100.00

2014 2013Rupees

46


Face Value Per Certificate of Modaraba of Rs.5/- each

st1 JUL 2013

6

8

10

12

Ma

rke

t va

lue

in R

s.R

up

ee

s in

Mill

ion

0

50

100

150

200

250

300

Qtr 1 Qtr 2 Qtr 3 Qtr 4

Profit

Cumulative Profit for the period

2013 -2014

st1 AUG2013

st1 SEP 2013

st1 OCT 2013

st1 NOV 2013

st1 DEC2013

st1 JAN 2013

st1 FEB2013

st1 MAR 2013

st1 ARL 2013

st1 MAY 2013

st1 JUN2013

Share Price Sensitivity AnalysisEarnings:

Government Policies

Change at political front

Announcement of dividends-

News on earnings, profits, future business prospects and positive or negative development on business activities

could enhace or dilute interest of investors in the listed Modaraba Certificates

- Government policies such as taxation measures, business policies and change in policy rate by State

Bank of Pakistan, could be percieved as positive or negative for business which may affect Modaraba Certificate price at

stock exchange. Positive economic reforms can attract investors.

- Any positive or negative news at political front could also affect the market price.

Expected distribution from earning could increase or decrease the Modaraba Certificate

prices.

Analysis of Variation in ResultsReported in Quaterly Accounts

47


REVENUE

391,507,973

ADMINSTRATIVE EXPENSES

70,750,329

OTHER INCOME

124,150,840

OTHER OPERATING CHARGES

INCOME STATEMENT 651,171

FINANCIAL CHARGES NET INCOME

114,767,714

285,443,429

NET PROFIT MARGIN

MODARABA MANAGEMENT COMPANY REMMUNERATION

0.73

32,948,960

REVENUE

SALES TAX ON MANAGEMENT REMMUNERATION

391,507,973

5,271,834

WORKERS WELFARE FUND

5,825,376

BALANCE SHEET CURRENT ASSETS REVENUE RETURN ON EQUITY

1,649,375,903 391,507,973 TOTAL ASSETS TURNOVER 0.09

FIXED ASSETS TOTAL ASSETS 0.08

3,406,764,826 5,056,140,729

CURRENT LIABILITIES TOTAL LIABILITIES

1,647,883,762 1,925,405,277

LONG TERM LIABILITIES STOCK HOLDERS' EQUITY

277,521,515 3,130,735,452

TOTAL LIABILITIES & EQUITIES

5,056,140,729 FINANCIAL LEVERAGE

STOCK HOLDERS' EQUITIES 1.62

3,130,735,452

Dupont Analysis

48


Notice is hereby given that the Annual Review Meeting of certificate-holders of First Habib Modaraba will be held

on September 16, 2014 at 9.00 a.m. at Institute of Cost and Management Accountants of Pakistan (ICMAP)

Building, ST-18/C Block-6, Gulshan-e-Iqbal, Karachi, to review the performance of the Modaraba for the year

ended June 30, 2014.

The certificate holders whose names appear in the register of certificate holders of FHM as on September 09,

2014 will be eligible to attend the Annual Review Meeting.

By order of the Board

Adnan ThanweyCompany Secretary

Karachi: August 9, 2014

Notice Of Annual Review Meeting

REQUEST TO CERTIFICATE HOLDERS

Pursuant to the directives of the Securities & Exchange Commission of Pakistan (SECP), CNIC number of Modaraba Certificate Holders has become mandatory to be mentioned on Dividend Warrant. Therefore, all those physical Modaraba Certificate Holders not yet submitted their CNIC are hereby requested to immediately send valid copy of CNIC at below mentioned address of Shares Registrar Office.

In order to comply with the directives of SECP vide their SRO 831(1) 2012 dated July 5, 2012, the Registrar Office may withhold the dispatch of Dividend Warrant under section 251(2)(a) of the Companies Ordinance, 1984 of those Certificate Holders who fails to submit the copy of CNIC before the close of book of Certificate Holders for entitlement of dividend as for the year ended June 30, 2014 announced by the Board of Directors in their meeting held on July 23, 2014. Noble Computer Services (Pvt.) Limited: Mezzanine Floor, House of Habib Building, (Siddiqsons Tower), 3-Jinnah Cooperative Housing Society, Main Shahrah-e-Faisal, Karachi, Pakistan. Tel: 021-34325482-87

49


50

ARM Decision and its Implementation

In compliance with direction of Registrar of Modaraba, Securities & Exchange Commission of Pakistan (SECP), First Habib

Modaraba (FHM) conducted Annual Review Meeting (ARM) of Certificate Holders of FHM on 7th August, 2013, in order to

review performance of FHM for the year ended June 30, 2013. According to SECP, in the said meeting the Certificate Holders

of Modaraba can come and discuss the annual accounts with the management of Modaraba. The ARM is separate with

Annual General Meeting (AGM) in terms of voting right and election of directors along with approval of external auditor.

The following were present from FHM

Mr. Wazir Mumtaz - Chairman

Mr. Abbas Ali Mohammad - Director

Mr. Muhammad Shoaib Ibrahim - Chief Executive Officer

Mr. Tehsin Abbas - Chief Financial Officer

Mr. Adnan Thanwey - Company Secretary

CEO has briefed about the business activity and performance of FHM during the year 2013-14 reported in directors’ report

attached with annual report. He also commented in detail on key financial figures reported in financial accounts of FHM.

The Certificate Holders acknowledged the hard and dedicated efforts of FHM particularly on financial performance and

declaration on cash dividend of 20% for the year ended 30th June, 2013. The Certificate Holders were also highlighted

certain points made their reservation as follows.

• Management must consider increase in dividend payment in coming years.

• Administrative expenses has been increased in 2012-13 which should be curtailed in coming year.

• Why FHM has made provision on WWF since there is some legal disputes.

• The legal applicability of Sales tax on management company’s remuneration.

• Alternate income segment in the absence of dividend income for 2013-14.

• Few Certificate Holders not received annual report.

CEO and CFO have addressed all the questions/reservations at the entire satisfaction of Certificate Holders. Other points and

suggestion were also noted for future compliance and most of them have been resolved during 2013-14 except those that

were legal or tax related.

High quality customer service is an integral part of FHM's philosophy. It is our

constant endeavor to provide greater services with wider accessibility.

Our corporate slogan is “Customer First”. We

always emphasis to provide best quality

serv ice to our cus tomers . We

continuously develop and improve

customer-service oriented culture

within FHM.

Knowing our customer and their

need is the key to our business

success. Our managers are well

equipped and well trained to

provide the most efficient and

personalized service to our customer.

We understand that our commitment to satisfy customer's needs must be fulfilled

within a professional and ethical framework, thereby creating an ongoing

relationships of trust and confidence in all their dealings with FHM.

We shall look forward to maintain high-level customer satisfaction through

improvement of strength and values, based on Sharia'h principles.

Customer Satisfaction

PERCENT METER

51


Wazir Mumtaz Ahmed Chairman

Muhammad Shoaib Ibrahim – Chief Executive Officer

Abbas Ali Muhammad – Director

Mohammad Haroon Ahmed – Director

–

Mr. Wazir Mumtaz Ahmed is a seasoned banker. His banking career span over a period of 48 years of committed

and dedicated services. He started his banking career in 1961 and carried diversified experience on several

senior positions. After completion of his Masters in Economics he got International Certifications in Commercial

Law & Economics from London Chamber of Commerce. His career is a perfect combination of Integrity and

Commitment which gave him additional advantage to reached upto the position of Senior Executive Vice

President in the Bank.

Muhammad Shoaib, is associated with FHM since the inception of modaraba. His extensive working experience

in Non-Banking Islamic Financial institutions for more than two decades makes him senior most person with such

rich experience of Islamic Finance in Pakistan. This intense exposure gave him the insight into the financial and

technical aspects of fund management in Islamic way. He has done Master's in Business Administration (MBA)

in Banking and Finance from Institute of Business Administration (IBA). He has completed Post Graduate

Diploma (PGD) in Islamic Banking and Finance from Centre of Islamic Economics (Darul Ulum), Karachi,

Pakistan. He has completed Certification of Director Training Program conducted by Institute of Chartered

Accountants of Pakistan. He is also Certified Islamic banker from Professional's Institute of Excellence who are

academic partner of University of Marathon U.S.A. and Pakistan Institute of Banking Studies, Pakistan. On

number of occasions he remained as an Executive Member of Modaraba Association of Pakistan and also

remained the Chairman of Modaraba Association of Pakistan.

Mr. Abbas Ali Muhammad started his career from Bombay (India). He joined Habib Investment Company in the

year 1951 as a “Trainee Officer”. In 1971, became the Chief Executive of Habib Investment Company. This

executive position also involved business management of several reputed companies as a Director. Mr. Abbas

Ali Muhammad has over 54 years of experience in financial management.

Mr. Mohammad Haroon Ahmed is a seasoned banker, his banking career spans over 54 years. He did his

commerce graduation in the year 1963 and Law graduation in 1965 and further expanded his education by

getting banking diploma from IBP and D.A. LCC (Accounts) Diploma from London Chamber of Commerce. He

carries a diversified experience of working on various senior positions in Pakistan and abroad. He has worked

with BCCI, Habib Bank AG Zurich and Habib Metropolitan Bank Limited on very senior and key positions.

DIRECTORS’ PROFILE

52


Syed Rasheed Akhtar

Mohammad Hashim – Director

– Director

Syed Rasheed Akhtar has rich experience in the banking field. His vast banking career spans over 36 years. He

possesses masters in statistics degree from University of Karachi. He started his banking career from Habib

Bank Limited in the year 1974 and carried diversified experience on very senior positions. He has been

associated with Bank Indosuez, Habib Bank AG Zurich, HBZ Bank Limited, South Africa. He also headed an

independent Islamic Banking Division of HBZ Bank Limited, South Africa from 2006-2010. He successfully

completed Certificate on Islamic Banking arranged by N.I.B.A.F. State Bank of Pakistan.

Mr. Mohammad Hashim is a Commerce Graduate from University of Karachi and has Banking diploma from

Institute of Bankers Pakistan (IBP), presently associate with Habib Metropolitan Bank Limited, handling as Head

of Foreign Investors Portfolio Management. Mr. Hashim has 44 years of Banking experience of local and

international banking particularly of Middle East region.

Mr. Hashim is carrying very rich experience of local and international money market, portfolio management and

secondary market operation.

DIRECTORS’ PROFILE

53


Share Registrar Office: M/s. Noble Computer Services (Pvt.) LimitedSiddiqsons Tower3-Jinnah Cooperative Housing Society, Main Shahrah-e-Faisal,Karachi - 75350PABX: (92-21) - 34325482-87Fax: (92-21) 34325442

Registered Office: First Habib Modaraba

th5 Floor, HBZ Plaza, I.I. Chundrigar Road, Karachi

Tel No. : 021-32635949-51Fax : 021-32627373Email: Web: www.habibmodaraba.com

U.A.N. : 111-346-346

[email protected]

Listing on Stock Exchanges

Investor Service Centre

Dividend Announcement:

Book Closure Dates.

Payment of dividend

First Habib Modaraba (FHM) Modaraba Certificates are listed on Karachi Stock Exchange (KSE), Lahore Stock

Exchange (LSE) and Islamabad Stock Exchange (ISE).

FHM share department is operated by Noble Computer Services (Pvt.) Limited. It also functions as an Investor

Service Centre and has been servicing nearly 4,882 Certificate holders. The Investor Service Centre is managed

by a well-experienced team of professionals and is equipped with the necessary infrastructure in terms of

computer facilities and comprehensive set of systems and procedures for conducting the Registration function.

The team is headed by Mr. Azadar Jafri at Registrar Office, Noble Computer Services (Pvt.) Limited and Mr.

Adnan Thanwey, Assistant Vice President & Company Secretary at FHM.

FHM share department has online connectivity with Central Depository Company of Pakistan Limited. The share

department undertakes activities Certificate Transfer and Transmission, issue of duplicate / revalidated dividend

warrant, issue of duplicate / replaced share Certificates, change of address and other related matters.

For assistance, Certificate holders may contact either the Registered Office or Share Registrar Office:

Contact Person: Contact Person:

Mr. Adnan ThanweyRegistrar Office:Assistant Vice President/Company Secretary Mr. Azadar JafriFirst Habib ModarabaHead of Operations

Noble Computer Services (Pvt.) Limited

The Board of Directors of the Management Company has approved Cash dividend of 22% (Re.1.10/- per

Modaraba Certificate of Rs.5/- each) for the financial year ended 30th June, 2014.

The Certificate Transfer Book of the Modaraba will remain close from 10-09-14 to 17-09-14 (both days are

inclusive).

The dividend warrants will be sent to Modaraba Certificate Holders within statuary time limit i.e. within 45 days

from the re-opening of Certificate Transfer Book to those Modaraba Certificate Holders whose name appear in

the Register of Member of the Modaraba after entertaining all requests for transfer of certificate lodge with the

Modaraba before the book closure date either in physical form or through CDC.

Certificate Holders Information

54


Div

idend in %

25%

20%

15%

10%

5%

0%

`14`13

`12`11

`10`09

DIVIDEND PAYOUT FOR SIX YEARS

(i) For certificates held in Physical Form: to certificate holders whose names appear in the Register of

Members of the Modaraba after entertaining all requests for transfer of certificates lodged with the

Modaraba before the book closure date.

(ii) For shares held in electronic form: to certificate holders whose names appear in the statement of

beneficial ownership furnished by CDC as at end of the business on book closure date.

In pursuant to the provisions of Finance Act, 2014

effective July 1, 2014, the rates of deduction of

income tax under Section 150 of the income Tax

Ordinance, 2001 has prescribed following tax rates for

payment of dividend for filers & non-filers of income

tax return, unless the Certificate holder's income is

tax-exempt.

1. Rate of tax deduction for filers 10%of income tax return.

2. Rate of tax deduction for non-filers 15%of income tax return.

the status of deduction of withholding tax will be

determined as per Active Taxpayer List (ATL)”

available on FBR website.

Zakat is also deductible at source from the dividend at the rate of 2.5% of face value of the share, other than

the corporate holders or the individuals who provide the undertaking for non deduction of Zakat.

Cash Dividends are paid through dividend warrants addressed to the Certificate holders whose name is

appearing on the register on the registrar of Certificate holders at the date of book closure. Certificate

holders are requested to deposit the dividend warrants into their bank account, at their earliest. It will help

the Modaraba in clearing their unclaimed dividend warrant.

Withholding of Tax & Zakat on Dividend

Dividend Warrant

Certificate Holders Information

55


Pattern of Certificate HoldingAs Per Requirements Of Code Of Corporate GovernanceAs at 30th June, 2014

CATEGORY NO. CATEGORIES OF CERTIFICATES HOLDERS

NUMBER OF

CERTIFICATES HELD

CATEGORY WISE NO. OF

CERTIFICATES HOLDERS

CATEGORY WISE

CERTIFICATES

HELD

PERCENTAGE

(%)

1 4,787 53,705,704 26.70

2 3 55,460 .03

3 38 2,617,655 1.30

4 3 169,552 0.02

40,000

5 - -

6 3 100,858,232 50.03

100,501,732

125,000

231,500

7 - -

8 13 10,520,984 5.22

9 1 1,584,070 0.79

1,584,070

10 13 3,051,896 1.51

11 2 24,936,735 12.37

12 8 1,190,808 0.59

13 11 2,908,904 1.44

4,880 201,600,000 100

71,200

INDIVIDUALS

INVESTMENT COMPANIES

JOINT STOCK COMPANIES

DIRECTOR, CHIEF EXECUTIVE OFFICER, AND THEIR SPOUSE AND MINOR CHILDREN.

MR. ABBAS ALI MUHAMMAD

EXECUTIVES

ASSOCIATED COMPANIES, UNDERTAKINGS AND RELATED PARTIES

HABIB MODARABA MANAGEMENT (PVT) LIMITED

TRUSTEE OF HABIB MODARABA MANAGEMENT

(PVT) LTD. EMPLOYEES CONTRIBUTORY PF

TRUSTEE OF FIRST HABIB MODARABA EMPLOYEES

CONTRIBUTORY PF

PUBLIC SECTOR COMPANIES AND COOPERATIONS

BANKS, DFIS, NBFIS INSURANCE COMPANIES, MODARABAS & MUTUAL FUNDS

MUTUAL FUNDS

NATIONAL BANK OF PAKISTAN - TRUSTEE DEPARTMENT NIT (U) FUND

FOREIGN INVESTORS

COOPERATIVE SOCIETIES

CHARITABLE TRUSTS

OTHERS

TOTAL

MR. MUHAMMAD HAROON AHMAD

MRS SHAMS HASHIM AND MOHAMMAD HASHIM 58,352

-

56


Pattern of Certificate HoldingAs at 30th June, 2014

Number of Certificate Holders Certificate Holdings Total Certificate Held

686 1 - 100 35,0991,037 101 - 500 324,185667 501 - 1,000 513,3061,401 1,001 - 5,000 3,329,717386 5,001 - 10,000 2,940,687140 10,001 - 15,000 1,708,00786 15,001 - 20,000 1,579,71280 20,001 - 25,000 1,834,47752 25,001 - 30,000 1,468,64526 30,001 - 35,000 848,00237 35,001 - 40,000 1,425,03827 40,001 - 45,000 1,130,12831 45,001 - 50,000 1,516,70216 50,001 - 55,000 840,74511 55,001 - 60,000 641,7729 60,001 - 65,000 569,2324 65,001 - 70,000 276,24011 70,001 - 75,000 803,4455 75,001 - 80,000 390,5008 80,001 - 85,000 650,6462 85,001 - 90,000 175,0008 90,001 - 95,000 734,70818 95,001 - 100,000 1,787,8167 100,001 - 105,000 708,3614 105,001 - 110,000 433,5001 110,001 - 115,000 111,0004 115,001 - 120,000 470,9204 120,001 - 125,000 495,9603 125,001 - 130,000 382,6844 130,001 - 135,000 523,5884 135,001 - 140,000 549,0086 140,001 - 145,000 856,9925 145,001 - 150,000 741,5044 150,001 - 155,000 607,9002 155,001 - 160,000 320,0005 160,001 - 165,000 808,9402 165,001 - 170,000 338,3911 170,001 - 175,000 171,3601 180,001 - 185,000 180,5001 185,001 - 190,000 190,0001 190,001 - 195,000 192,0001 195,001 - 200,000 200,0004 200,001 - 205,000 807,6451 205,001 - 210,000 206,6004 210,001 - 215,000 850,7963 215,001 - 220,000 652,6202 225,001 - 230,000 456,8001 230,001 - 235,000 231,5002 240,001 - 245,000 481,9441 245,001 - 250,000 249,0001 250,001 - 255,000 255,0001 255,001 - 260,000 259,5002 260,001 - 265,000 520,7962 265,001 - 270,000 538,0001 270,001 - 275,000 270,2002 280,001 - 285,000 564,4801 290,001 - 295,000 293,0002 295,001 - 300,000 600,0001 320,001 - 325,000 322,5601 325,001 - 330,000 326,0001 340,001 - 345,000 342,6721 345,001 - 350,000 350,0001 375,001 - 380,000 379,2962 385,001 - 390,000 778,0002 400,001 - 405,000 800,8001 405,001 - 410,000 410,0001 415,001 - 420,000 416,5001 420,001 - 425,000 424,5001 425,001 - 430,000 425,3441 445,001 - 450,000 446,0002 455,001 - 460,000 917,0111 500,001 - 505,000 504,1381 535,001 - 540,000 537,5001 590,001 - 595,000 592,6001 600,001 - 605,000 602,4001 640,001 - 645,000 645,0002 680,001 - 685,000 1,370,0001 745,001 - 750,000 750,0003 820,001 - 825,000 2,472,8322 850,001 - 855,000 1,705,5001 855,001 - 860,000 858,5001 1,195,001 - 1,200,000 1,200,0001 1,200,001 - 1,205,000 1,200,8001 1,300,001 - 1,305,000 1,300,1921 1,395,001 - 1,400,000 1,396,0001 1,580,001 - 1,585,000 1,584,0701 1,825,001 - 1,830,000 1,828,0001 2,010,001 - 2,015,000 2,015,0001 2,110,001 - 2,115,000 2,111,0001 2,140,001 - 2,145,000 2,143,3151 3,965,001 - 3,970,000 3,969,0001 20,155,001 - 20,160,000 20,160,0001 21,990,001 - 21,995,000 21,993,2941 24,925,001 - 24,930,000 24,929,4401 58,345,001 - 58,350,000 58,348,438

4,880 201,600,000

57


In connection with your review of Statement of Compliance with the Best Practices of the Code of Corporate

Governance (the Code) prepared by the Board of Directors of Habib Modaraba Management (Private) Limited (the

Management Company) in respect of First Habib Modaraba (the Modaraba) for the year ended June 30, 2014, we

confirm, to the best of our knowledge and belief, as of the date of this letter, the following representations made to you

during your review:

The statement is being presented to comply with the code of Corporate Governance (CCG) contained in Regulation 35

of Listing Regulations (chapter XI) of Karachi Stock Exchange Limited, Lahore Stock Exchange Limited, and

Islamabad Stock Exchange Limited for the purpose of establishing a frame of good governance, whereby a listed

company is managed in compliance with the best practice of corporate governance.

The Modaraba has applied the principles contained in the CCG in the following manner;

1. At present the Board comprises of six directors of which five are non-executives and only the Chief Executive

Officer is an Executive Director.

Names

Mr. Syed Rasheed Akhtar Non-Executive Independent Director

Mr. Muhammad Shoaib Ibrahim Executive Director

Mr. Wazir Mumtaz Ahmed Non-Executive Director

Mr. Abbasali Muhammad Non-Executive Director

Mr. Mohammad Haroon Ahmed Non-Executive Director

Mr. Mohammad Hashim Non-Executive Director

The independent director meets the criteria of independence under clause i(b) of CCG.

2. The Directors have confirmed that none of them is serving as a director on more than seven listed companies,

including this Management Company.

3. All the resident directors of the Management Company are registered as taxpayers and none of them has

defaulted in payment of any loan to a banking company, a DFI or an NBFI or, being a member of a stock

exchange, has been declared as a defaulter by that stock exchange.

4. A casual vacancy occurring on the Board during the period and was filled up by the directors.

5. The Modaraba has prepared a “Code of Conduct” and has ensured that appropriate steps have been taken to

disseminate it throughout the Modaraba along with its supporting policies and procedures.

6. The Board has developed a vision/mission statement, overall corporate strategy and significant policies of the

Modaraba which are well implemented.

7. All the powers of the Board have been duly exercised and decisions on material transactions, including

appointment and determination of remuneration and terms and conditions of employment of the CEO, other

executive and non-executive directors, have been taken by the Board.

8. The board has arranged one training program for its director during the year.

9. The meetings of the Board were presided over by the Chairman and, in his absence, by a director elected by

the Board for this purpose and the Board met at least once in every quarter. Written notices of the Board

meetings, along with agenda and working papers, were circulated at least seven days before the meetings.

The minutes of the meetings were appropriately recorded and circulated.

Category

STATEMENT OF COMPLIANCE WITH THE BEST PRACTICES OF CODE OF CORPORATE GOVERNANCE – YEAR ENDED JUNE 30, 2014

58


10. No appointment of CFO, Company Secretary and Head of Internal Audit has been made during the year.

11. The directors’ report for this year has been prepared in compliance with the requirements of the CCG and fully

describes the salient matters required to be disclosed.

12. The financial statements of the Modaraba were duly endorsed by CEO and CFO before approval of the Board.

13. The directors, CEO and executives do not hold any interest in the shares of the company other than that

disclosed in the pattern of shareholding.

14. The Modaraba has complied with all the corporate and financial reporting requirements of the CCG.

15. The Board has formed an Audit Committee. It comprises three members, of whom all are non-executive

directors including the Chairman of the committee.

16. The meetings of the audit committee were held at least once every quarter prior to approval of interim and

final results of the Modaraba and as required by the CCG. The terms of reference of the committee have been

formed and advised to the committee for compliance.

17. The Board has formed an HR and Remuneration Committee. It comprises three members, of whom all are

non-executive directors including the Chairman of the committee.

18. The Board has set up an effective internal audit function.

19. The statutory auditors of the Modaraba have confirmed that they have been given a satisfactory rating under

the quality control review program of the ICAP, that they or any of the partners of the firm, their spouses and

minor children do not hold certificates of the Modaraba and that the firm and all its partners are in compliance

with International Federation of Accountants (IFAC) guidelines on code of ethics as adopted by the ICAP.

20. The statutory auditors or the persons associated with them have not been appointed to provide other services

except in accordance with the listing regulations and the auditors have confirmed that they have observed

IFAC guidelines in this regard.

21. The ‘closed period’, prior to the announcement of interim/final results, and business decisions, which may

materially affect the market price of Modaraba’s securities, was determined and intimated to directors,

employees and stock exchange(s).

22. Material/price sensitive information has been disseminated among all market participants at once through

stock exchange(s).

23. We confirm that all other material principles enshrined in the CCG have been complied with.

Muhammad Shoaib IbrahimChief Executive Officer

Karachi: July 23, 2014

59


We have reviewed the enclosed Statement of Compliance with the best practices contained in the Code of

Corporate Governance (the Code) prepared by the Board of Directors of HABIB MODARABA MANAGEMENT

(PRIVATE) LIMITED, the Management Company of FIRST HABIB MODARABA, for the year ended June 30, 2014

to comply with the requirements of Listing Regulations No 35(Chapter XI) of the Karachi Stock Exchange Limited,

Lahore Stock Exchange Limited and Islamabad Stock Exchange Limited where the Modaraba is listed.

The responsibility for compliance with the Code is that of the Board of Directors of the Management Company of the

Modaraba. Our responsibility is to review, to the extent where such compliance can be objectively verified, whether

the Statement of Compliance reflects the status of the Modaraba’s compliance with the provisions of the Code and

report if it does not and to highlight any non-compliance with the requirements of the Code. A review is limited

primarily to inquiries of the Management Company’s personnel and review of various documents prepared by the

Management Company to comply with the Code.

As part of our audit of the financial statements we are required to obtain an understanding of the accounting and the

internal control systems sufficient to plan the audit and develop an effective audit approach. We are not required to

consider whether the Board of Directors’ statement on internal control covers all risks and controls or to form an

opinion on the effectiveness of such internal controls, the Modaraba’s corporate governance procedures and risks.

The Code requires the Management Company to place before the Audit Committee, and upon the recommendation

of the Audit Committee, place before the Board of Directors for their review and approval its related party

transactions distinguishing between transactions carried out on terms equivalent to those that prevail in arm’s length

transactions and transactions which are not executed at arm’s length price and recording proper justification for

using such alternate pricing mechanism. We are only required and have ensured compliance of this requirement to

the extent of the approval of the related party transactions by the Board of Directors upon recommendation of the

Audit Committee. We have not carried out any procedures to determine whether the related party transactions were

undertaken at arm’s length price or not.

Based on our review, nothing has come to our attention which causes us to believe that the Statement of Compliance

does not appropriately reflect the Modaraba’s compliance, in all material respects, with the best practices contained

in the Code as applicable to the Modarabafor the year ended June 30, 2014.

Muniff Ziauddin & Co.Chartered Accountants

Engagement PartnerMuhammad Moin Khan

REVIEW REPORT TO THE CERTIFICATE HOLDERS ON STATEMENT OF COMPLIANCE WITH THE BEST PRACTICES OF CODE OF CORPORATE GOVERNANCE

Karachi : July 23, 2014

60


Audit Committee Terms of Reference

i. To recommend to the Board of Directors the appointment of external auditors by the Modaraba's Certificate holders and consider any questions of resignation or removal of external auditors, audit fees and provision by external auditors of any service to the Modaraba in addition to audit of its financial statements;

ii. To review the quarterly, half-yearly and annual financial statements of the Modaraba, prior to their approval by the Board of Directors;

iii. To facilitate the external audit and discussion with external auditors of major observations arising from interim and final audits and any matter that the auditors may wish to highlight;

iv. To review the management letter issued by external auditors and management's response thereto;

v. To ensure coordination between the internal and external auditors of the Modaraba;

vi. To review the scope and extent of internal audit and ensuring that the internal audit function has adequate resources and is appropriately placed within the Modaraba;

vii. To consider the major findings of internal investigation and management's response thereto;

viii. To ascertain that the internal control system including financial and operational control, accounting system and reporting structure are adequate and effective;

ix. To determine compliance with relevant statutory requirements; and

x. To monitor compliance with the best practices of corporate governance and identification of significant violation thereof;

The audit committee comprises of the following members:

Members No. of Meeting Attended

Mr. Abbas Ali Muhammad 4Non Executive (Chairman) Mr. Wazir Mumtaz Ahmed 4Non Executive (Member)

2Non Executive (Member)

Mr. Syed Rasheed Akhtar -Non Executive (Member)

Secretary to Audit Committee Mr. Shakeel Ahmed Mangroria 4

Mr. Wazir Husain Jafree (Late)

Board Committees

HR Committee Terms of Reference

The committee shall be responsible for:

i) recommending human resource management policies to the board;

ii) recommending to the board the selection, evaluation, compensation (including retirement benefits) and succession planning of the CEO;

iii) recommending to the board the selection, evaluation, compensation (including retirement benefits) of CFO, Company Secretary and Head of Internal Audit; and

iv) consideration and approval on recommen-dations of CEO on such matters for key management positions who report directly to CEO or BOD.

The Human Resource committee comprises of the following members:

Members No. of Meeting Attended

Mr. Abbas Ali Muhammad 2Non Executive (Chairman)

Mr. Wazir Mumtaz Ahmed 2Non Executive (Member)

Mr. Wazir Husain Jafree (Late) 2Non Executive (Member)

Mr. Syed Rashed Akhtar has been appointed as Director in place of Mr. Wazir Hussain Jafree (Late) on >>>>>. Subsequently, in the BOD meeting held on April 29, 2014 he has been appointed as a Member and Chairman of Audit Committee and attended the Audit Committee meeting held on July 23, 2014.

61


For the year ended June 30, 2014Organizational Structure

Internal Audit

Company Secretary Audit Committee

Chief Executive

Finance Marketing Credit Administration

Legal & Recovery

Administration & HR

HR Committee

ShariahCompliance

Risk Management


Treasury/Investment

Board of Directors

62


Shariah Adviser Profile

Mufti Abdul Sattar Laghari

Mufti Abdul Sattar Laghari holds a ShahadatulA'almiah (Dars e Nizami) and a

Master scholar from JamiaDarul-Uloom, Korangi, Karachi. He holds Specialization

(Takhassus) in Islamic Fiqh and Fatwa from DarulIftawalIrshad Nazimabad 4

Karachi with Master in Islamic Studies from University of Karachi.

Mufti Laghari also holds a certificate of 1 year correspondence course in Islamic

Law from Shariah Academy International Islamic University Islamabad Pakistan

along with certificates of various courses on Islamic Banking and Finance

conducted by Prominent learning Centers in Pakistan & Malaysia. He secured top

position within Islamic Banking Certificate Course # 20 conducted at NIBAF

Karachi.

He has been providing Shariah Advisory services since 2005. He previously worked

as Shariah Advisor in Islamic Banking Division of National Bank of Pakistan and

presently associated as Shariah Advisor with Islamic Banking Division of Habib

Metropolitan Bank Limited. Besides, he is Shariah Advisor of Standard Chartered

Modaraba & KASB Modaraba and also gives Shariah advisory services to NBFI and

Modaraba Association of Pakistan from time to time.

Mufti Laghari has remained a member of sub committees for review of some AAOIFI

Shariah standards at State Bank of Pakistan. He is a master trainer in Islamic

Banking and Finance and has conducted extensive courses throughout Pakistan.

During his career he has also issued numerous fatawas on general as well as

financial & Islamic Banking issues.

63


Role of Chairman and Chief Executive Officer

At FHM the role of Chairman and the Chief Executive are

separate and their responsibilities are clearly set out as

follows. The concept of separation of the role of the

Chairman from the role of CEO implies that the Chairman

should be independent from management and free from any

interest or other relationship which could interfere with the

Chairman’s independent judgment.

Mr. Wazir Mumtaz Ahmed is Chairman of Board of Directors

of Habib Modaraba Management (Private) Ltd., He is very

seasoned banker and carrying diversified banking and fund

management experience of more than 40 years. Being a

Chairman of Board he is responsible for:

¬Leads the Board and also act as a liaison between

management and the Board.

¬Ensure effective operations of the Board and its

committees.

¬Make sure that the board focuses on its key tasks.

¬Always ensure that issues relevant to those areas

are considered by the Board.

¬He coordinates with Committees to ensure that

appropriate policies and procedures are in place for

the effective management of the affairs of the

Management Company and FHM.

¬To ensure that the Directors are properly informed

and that sufficient information is provided to enable

the Directors to form appropriate judgments.

Mr. Muhammad Shoaib Ibrahim is the Chief Executive

Officer of the Modaraba. He has an extensive experience of

Islamic banking and finance. He has done master’s in

Business Administration in Banking and Finance from

Institute of Business Administration (IBA). He has completed

Post Graduate Diploma (PGD) in Islamic Banking and

Finance from Centre of Islamic Economics (DarulUlum),

Karachi, Pakistan.

Chairman

Chief Executive Officer

Being CEO he is responsible to manage the business of

Modaraba within the authorities delegated by the Board. His

responsibilities are set out as follows:

¬To Manage day to day affairs of Business

¬To implement long term strategic plan, goal and

objective of the FHM

¬To make Shariah governance within the operation of

FHM.

¬To Enable Board of Directors to fullfill its governance

functions

¬To give directions for achievement of business

objective of the FHM.

¬Maintain market presence and profitability of the

FHM.

¬Evaluate asset utilization and for redeployment in

prudent manner.

¬To make sure of best utilization of FHM’s resources.

¬To make sure strong compliance culture and internal

control within the organization.

¬To make available proper working environment for

all staff members

¬To manage human resource for smooth working of

organization

¬Effective coordination with regulator for

implementation of proper regulatory framework

within organizations.

64


Performance Evaluation of the Board

Performance Evaluation of the Chief Executive OfficerThe Chief Executive Officer (CEO) is responsible for leading the development and execution of the FHM’s long term strategy

with a view to creating certificate holders value. The CEO’s leadership role also entails being ultimately responsible for all

day-to-day management decisions and for implementing the FHM’s long and short term plans.

The CEO coordinates between the Board and management of the FHM and communicates to the Board on behalf of

management. The CEO also communicates on behalf of the FHM to certificate holders, employees, regulators, other

stakeholders of FHM.

During the year CEO of FHM being part of the Board was present in every meeting of the Board. The CEO provided overview

of the FHM’s performance to the Board and addresses any specific questions by the Board members.

The performance of CEO is assessed through performance and target given by the board. The key factors of evaluation

include financial performance, business process, compliance, risk management, sound internal control and human resource

management. The boards found that during the year all the above areas have successfully managed at satisfactory level in

accordance with strategy set by the board.

Board of Directors act as governing trustees of FHM on behalf of the regulator and Certificate holders of

Modaraba. There isn’t a scheme for annual appraisal of the board’s performance as whole. However, each

member of the Board carried out a self-assessment of his own effectiveness as an individual as well as

effectiveness of the Board as a team for the year 2013-14. Furthermore, the FHM is abiding by the Code of

Conduct which is formulated by the Board. The Board set following evaluation criteria to judge its performance.

¬Ensures that compliance mechanism of Shariah governance is in place and followed diligently.

¬Compliance with all relevant regulatory laws and regulations by management of FHM.

¬Review of the long term strategic business plans and goals and its achievement.

¬Proper risk management tools are in placed which supports for company’s performance and growth.

¬Make sure adequate internal control system within FHM and its regular assessment through self-

assessment and audit committee.

¬Ensuring required quorum of Board meeting is available in order to have detailed deliberation and quality

decision on matters of significance.

¬According to new Code of Corporate Governance, ensures the training of board particularly new member

is fully aware of his roles and responsibility preferably knowledge on Islamic finance.

65


Report of the Audit Committee

Composition of the Committee

Scope of Audit Committee

Internal Control Framework (ICF)

The Audit Committee (“the Committee”), appointed by and

responsible to the Board of Directors comprises of three

directors, all of them are non-executive including one

independent director.

The following are the members of Audit Committee.

Mr. Rasheed AktherChairman of Audit Committee Non-Executive Independent Director

Mr. Wazir Mumtaz AhmedNon-Executive Director

Mr. Abbas Ali MohammedNon-Executive Director

The Committee is playing active role in overseeing FHM

financial matters and governance issues. The Committee

has deepened its focus on the effectiveness of internal

control, compliance, assurance, internal audit functions, and

other responsibilities given by the Board of Directors. The

Committee is authorized to investigate any matter within its

terms of reference, access all documents and information.

However, the Committee has no executive function and its

primary objective is to review and make their

reservation/suggestion on the financial and governance

functions of FHM.

The audit committee is also adhered to make sure the ICF.

The management of FHM is responsible to establish and

maintain an adequate and effective system of ICF and

procedures. The core objective of ICF is as follows:

¬Effectiveness and efficiency of operations.

¬Reliability of financial reporting.

¬Compliance with applicable laws and regulations.

¬Improved reporting throughout the organization.

Compliance and ICF functions are well integrated and

entrusted with the responsibilities to oversee operations and

rectifications of irregularities and control lapses pointed out

through audit committee reviews from time to time.

Concerted efforts are made to improve the control

environment at every level by continuous review and

streamlining of procedures to prevent and rectify control

lapses. The department also ensures the compliances of

regulatory requirement, FHM’s internal policies and

procedures with specific emphasis on KYC, AML and

Shariah audit mechanism. The Audit Committee actively

monitors implementation to ensure that identified risks are

mitigated to safeguard the interest of the institutions. During

the year following control mechanism further strengthen

such as:

¬Audit approach: Risk and system based further

improved

¬ERP and integrated control further increased.

¬Documentation management application introduced

which enhanced error free working.

The Internal Auditor plays very effective role to support

Audit Committee to discharge their responsibilities. The

relationship between the Audit Committee and internal

auditor is central to enabling the committee to satisfactory

deliver assigned task given by board of directors. Internal

audit is functionally responsible to the Audit Committee and

works to the committee through its department. Reports by

internal audit help the Audit Committee with a key source of

information to view entity’s operation.

Major roles and responsibilities of internal audit function are

summarized as below:

¬Evaluates and provides reasonable assurance that

risk management, control, and governance systems

are functioning as intended and will enable the

organization’s objectives and goals to be met.

¬Reports risk management issues and internal control

deficiencies identified directly to the audit committee

and provide recommendations for improving the

organization’s operations, in terms of both efficient

and effective performance.

¬Evaluates information security and associated risk

exposures.

Role of Internal Auditor

66


¬Evaluates regulatory compliance program with

consultation from legal counsel.

¬Evaluates the organization readiness in case of

business interruption.

¬Maintains open communication with management

and the audit committee.

¬Coordinate with other internal and external

resources as appropriate.

The Audit Committee has concluded its review of the

conduct and operations of the FHM during 2013-14, and

report that;

¬Four meetings of Audit Committee were held during

the year 2013-14

¬The Audit Committee reviewed quarterly, half yearly

and annual financial statements of the FHM prior to

their approval by the Board of Directors.

¬The Audit Committee has reviewed and approved all

related party transactions.

¬The Audit Committee has recommended to the

Board of Directors that M/s. Munif Ziauddin &

Company, Chartered Accountants being eligible,

appointed to act as statutory auditors of FHM for the

financial year ended June 30th 2014.

¬The Audit Committee has reviewed management

letter issued by external auditors and management

response.

¬The Head of Internal Audit has access to the

Chairman of the Board Audit Committee and the

Committee has ensured sufficient internal audit

acumen and that the function has all necessary

access to Management and the right to seek

information and explanations.

¬The internal audit function has carried out its duties

under the charter defined by the Committee.

Apart from above, the Committee also reviewed and

deliberated upon.

¬An update on entire audit activity carried out by

Internal Audit Function during the year.

¬Significant Internal Audit findings pertaining to Audit

committee.

¬Update on evaluation of ICF system by internal audit

as well as compliance thereon by the management.

Conduct of meeting by Audit Committee

¬Compliance Status of Shariah advisor Reports.

External audit is an independent function of audit. For the

period ended 30th June, 2014 this function has been done

by M/s Muniff Ziauddin, Chartered Accountant as an

external auditor of FHM.

The Chairman of audit committee has provided opportunity

of meeting of relevant partner of external auditors M/s Muniff

Ziauddin, Chartered Accountant, separately, without any

Senior Executive of FHM being present to ensure that the

Auditors had the independence to discuss and express

their opinions on any matter and also for the Committee to

have the assurance that the management has fully provided

all information and explanations requested by the Auditors.

The Audit Committee approves the audited accounts of

FHM for the period ended 30th June, 2014 audited by

M/s Muniff Ziauddin, Chartered Accountant and confirms

that there is no material non-compliance found within the

audited accounts or narrated by auditors.

ChairmanAudit Committee

’s

External Audit

67


Avoiding Conflict of Interest Policy

The Board is conscious of its obligations to ensure that Directors avoid conflicts of interest between their responsibilities and

their other interests. The Board has taken steps to ensure that conflicts and potential conflicts of interest of Directors are

disclosed to the Board. The governance structure of the FHM ensures that Directors take all necessary steps to avoid

conflicts of interest and any Director with a material personal interest in a matter being considered by the Board must be

declared.

Directors abstain from voting on any Board resolution in which they or their close relations have interests such as credit

facility or purchase of any assets etc. Their votes are also not counted in establishing the quorum for the relevant agenda

item.

In pursuance of the requirements under Sections 236(1) the Companies Ordinance Directors are required to disclose any

financial accommodation from and/or deposits made with the FHM by entities where they function as Chairman or a Director.

Furthermore, as per listing regulation no. 16 of Stock Exchange it is also required to mention “Related Party Disclosure” in

annual balance sheet. For this purpose all directors have already submitted annual declaration to Secretary on their holding

in Certificate of Modaraba.

Policy for protection of data of the company”

The FHM has well defined procedures to maintain data protection

management, the administration of backup processes to ensure

that backup tasks run on schedule. There are predefine schedule

that ensure data is securely backed up and recoverable whenever

the same are needed. FHM has also arranged storage and

BCP/DR solution with M/s. Cube XS Weatherly (Private) Ltd.

The required site of Cube XS is fully equipped with proper

infrastructure and available at all times as a disaster recovery site.

This storage has minimized the impact in case any distress

situation where business will continue without any interruption. At

our cold DR site engineer and logistical support teams can readily

move hardware into our data center and get back up and running

process.

FHM’s online backup service supports us to secure data on real time basis. Offsite, online backups also help recover

irreplaceable data and eliminate errors associated with traditional tape backup. FHM have daily weekly and monthly data

backup processes which consisting on daily upload data to DR site. The company also has two sites located in Karachi

and Lahore where data back-up is taken regularly.

Our disaster recovery plan is in placed to secure data of digitalization of document on weekly basis. Regular backup

document data support us to access corporate and other information. It further assure us that corporate information can be

accessed at any of location in Pakistan without moving or corresponding hard copies.

The company has installed latest state of the art Fire Suppression and Detection System to protect its data center.

Additionally, we have strengthened our DR Plan with use of Data Guard and Online Transfer of Data to DR Site using Fiber

Optic Technology.”

68


IT Governance Policy

Information Technology has become a backbone for

conducting business particularly in financial sector where a

quality customer service is core business objective of the

organizations and it depends exclusive on use of

Information and Communications Technologies. In an

increasingly regulated world, organizations of all sizes and

industries need to effectively manage and protect

information. IT Governance has become a hot topic and

inadequate compliance and security controls not only

vulnerable to business risks but also expose to legislative

and regulatory breaches. This ultimately led to inefficient

business processes and lack of customer confidence which

impact organization’s sustainability and profitability.

Within IT Governance framework of FHM the right alignment

of IT objective those of the defined in the business terms of

FHM are ensured by the Information Technology

Governance mechanism. IT Governance which forms an

integral part of the FHM’s Corporate Governance supports

for achieving optimum results through linking between

strategic direction and information system management of

FHM. It makes sure that all stakeholders’ interests are taken

into account and that processes provide measurable

results. FHM IT department having the vision to aligned its

vision with the very strategic objective of the organization.

FHM’s IT governance covers following functional areas.

Investing in licensed applications in compliance with

relevant laws.

Integration of the different systems used by various

departments.

Sound IT security is in placed in such a way that protects

within the FHM and outside to function asa proactive

management of information security along with its risk and

controls.

Compliance area

Financial reporting area

IT Security area

Judicious Capital Expenditure

IT Risk Management functions

Paperless documentation processes

All major IT-related procurement is reviewed and approved

by a relevant IT committee.

IT related Risk Management processes are frequently

reviewed and strengthen in order to effectively manage

them to mitigate the risk and security threats.

In order to make green IT environment, continuous efforts

have been made to minimize carbon print through migration

of electronic and soft management of documents flows.

69

IT GOVERNANCE

TNEME

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GYETARTSDESIGN

OPERATIONS

ECNA MROFREP


Environment and Social Responsibility

The global economy continues to face the rising problems

of poverty, excessive inequalities of income and wealth,

high levels of inflation, large macroeconomic budgetary

imbalances. Sustainability is the long-term maintenance of

responsibility, which has environmental, economic, and

social dimensions, and encompasses the concept of the

responsible management of resources.

As key forces in society, organizations of all kinds have an

important role to play in achieving this goal. FHM firm

believe that sustainable development is not possible without

building our communities and environment. Our

commitment is for environmental, economic and social

wellbeing for today and tomorrow. Although it is an

economic issue but there is an ethical standpoint that lies

behind.

The Environmental and Social Responsibility Policy of FHM

reflect the firm’s recognition that there can be a strong,

positive correlation between financial performance and

corporate, social and environmental responsibilities. We are

focused on ensuring that all major activities undertaken by

the FHM are correlated with the requirement of our Social

and Environment system. FHM firm believes that the

observance of sound environmental and social strategies

are essential for building strong brands and safeguarding

reputation, which in turn is vital for long-term success.

FHM is continuously striving for better prosperity of people,

society and other stakeholders. It is our aim to create more

value for prosperity of the society and nation such as:

¬FHM encourage equal opportunity employment

without any discrimination whether it is gender or

any disability, we believe that every human mind

having talent which can be benefited to the

institutions.

¬Health and safety always remain an utmost concern

of the management of FHM. Within the HR policy, the

staffs of FHM are covered under health and group

life insurance policies with renowned insurance

companies.

¬Develop staff members through workshops and on

job training. FHM promote culture that is conducive

to learning with right knowledge and create value

both in their own lives and careers.

Our approach to Social Responsibility

Our approach to Environment sustainability

It is our corporate objective to consume minimum natural

resources and create low emission and waste. We also

discourage those customers whose businesses are not

environment friendly. FHM conscious on negative effect of

waste and initiated following measures to minimize paper

use by various departments.

¬Electronic documents managements system

introduced to minimize printing of papers.

¬Customers’ correspondences being sent via e-mails.

¬Web based communication system has been

started to communicate with customers and other

stakeholders.

¬Constantly raise staff awareness for paperless office

concept and discourage unnecessary printing of

documents.

70


Human Resource

We consider that human capital is a one of the most

important and vital resources for sustainable development

and growth of any organizations. Human Resource (HR)

department always ensures that all the new induction is well

assessed as per job requirement, appointed on merit along

with required competencies and skills. Hiring a quality

personnel and retaining them are the crucial task of HR

department.

HR department always seeks for qualified, educated and

talented candidate and do not discriminate with regard to

race, language, religious belief or gender. We only consider

employees’ relevant skills and competencies as those are

the attributes that create sustainable value.

Similarly, for the existing employees, HR department is

proactively engaged in an ongoing process of developing

human capital and bringing it in line with required working

standards in terms of skills and competencies including

moral and ethical values. We always focused to induct

personnel having good educational background and multi-

functional skills.

FHM has policy of promoting employees within the

organization with strong succession plan which is placed at

all levels. We have also stringent promotion criteria for

employees which are on merit based with pre-defined

eligibility parameters. Moreover we have comprehensively

designed performance appraisal process which is reviewed

every year at the time of annual increment and promotion.

HR department also give priority on training and

development of employees, spending good amount on this

segment each year which plays a vital part for professional

grooming of staff members.

HR department constantly strives to improve HR system and

processes in line with strategic vision and direction of

Board, HR committee and management of FHM for

betterment and well being of employees and institutions.

Succession Planning

FHM’s management review succession planning regularly to

provide leadership continuity. We believe that changes are

inevitable and in order to meet any vacuum in any key

position due to retirement, resignation etc., the relevant

vacancy can be filled without any delay. Performance

evaluation based on one to one interaction, cross functional

team exposure and target achievement help the

assessment of potential candidates for succession

planning.

All employees are encouraged to develop skills that further

improve their personal and professional development. We

recognized that a successful transition of key management

and team building minimize disruption and ensure business

continuation along with sustainable future growth.

71


Investors’ Grievance Policy

We at FHM endeavor to address all complaints regarding

service deficiencies or other grievance of our investor in a

reasonable time and manner. Investor complaints constitute

an important voice of investor and this must be handled

through a well-structured grievance redress framework.

Complaint redressal is supported by a review mechanism to

minimize the recurrence of similar issues in future. We

realize that quick and effective handling and resolution of

customers/investors grievance is very important in order to

improve service standard of any institutions.

FHM is well focused on redressing investor grievances and

ensure that appropriate mechanism exists for receiving and

addressing complaints from our customer/investors in good

manner and in shortest possible time. We believe that

Investor service is an important segment for sustained

business growth and it is our corporate motto that our

investors must receive exemplary service across different

areas of operations. Prompt and efficient service is essential

to retaining existing relationships and investor’s satisfaction.

¬Every customers/Investors must be treated fairly at

all times.

¬Complaints raised by investors must be dealt with

courtesy and in a timely manner.

¬Grievance, if any, shall be resolved in a proper and

time bound manner with detailed communication to

relevant complainer.

¬In case the resolution needs time, an interim

response acknowledgment shall be issued.

¬All the staff member of FHM work in good faith and

without prejudice towards the interests of the

investors.

¬Those staff members responsible to manage the

customer’s grievance are encouraged to give

periodically training in line with modern techniques

for proper handling of the job.

Under the policy, FHM ensure that

Grievance redress handling mechanism

¬Handling of all the investors’ grievances for the FHM

is a centralized function and is being handled by the

compliance department at head office.

¬A designated email ID has been allocated where the

investors can make complain and same is monitored

by the compliance department on regular basis.

¬An Investor can also make a written complaint

through letter.

¬All the investor grievances received via email ID

shall be scrutinize and verified by the compliance

department and it would initiate necessary steps to

resolve the complaint within the reasonable time

frame.

¬Audit & Compliance Department will obtain all

information available on the complaint which is

considered necessary for a proper investigation,

look into all the necessary information and resolve

these as soon as possible.

¬Any serious complaint must bring into the

knowledge of senior management & CEO of FHM as

well.

72


s

FHMFHM

CertificateHolders

Employee

SuppliersIndustry

peers

Customers Investors

GovernmentCommunities

Stakeholders Engagement

Stakeholder engagement has always been a crucial to an organization’s performance. Stakeholder is an integral to the organization’s business can be described as an effort to understand and involve them in business activities and decision making processes. Stakeholders are defined here as any group or individual who can affect or can be affected by an organization or its activities.

Stakeholder Engagement is emerging as a means of describing a broader, more inclusive and continuous process between a company and those potentially impacted that encompasses a range of activities and approaches. The overall purpose of stakeholder engagement is to drive strategic direction and operational excellence for organizations and to contribute to the kind of sustainable development from which organizations, their stakeholders and wider society can benefit by:

LearningIdentifying and understanding

InnovatingDrawing on stakeholder knowledge and insights to inform strategic direction and drive operational excellence.

PerformingEnhancing performance.

We always give importance to work with our stakeholders at all levels of the business in order to maintain our sustainable development and performance. The integration of stakeholders into our sustainability risk assessment and management processes helps us identify and priorities stakeholders concerns.

In our business we have some key stakeholders what we try to do to meet or exceed their expectations of as responsible corporate venture. We wish to engage with individuals and groups who can help us continue to improve in these areas. These include, our Certificate Holders, Investors, and Employees, Suppliers, Regulators and local communities. Some of our engagement with stakeholders is listed below.

Every year FHM has annual review meeting, where we invite our all certificate holders and interact with them and take their suggestions for improvement of businesses. FHM updates their Certificate holders and investors through Annual Report, Quarterly Financial announcements, investor’s road shows and conferences. FHM continuously upgrades their technological supports for better and timely information to its certificate holders and investors and keep them informed through various resources and dialogue.

At FHM, we always respect customer needs and design our financial products according to their business needs without compromising principles of Islamic Finance. Being Islamic Financial Institution, it is built-in feature in corporate objective of FHM for fairness of transaction and no exploitation or deceive customer’s rights. FHM monitors the fair terms of pricing and accessibility in its products and services offerings. It protects its customers’ privacy and security of their personal information

Certificate Holders

Customer

Employees

Government/Regulators

Suppliers

Communities

FHM has excellent blend of professional personnel who are well committed and dedicated to their respective jobs.

Our Human Resource department always encourage to make such policies for employees which promote culture of reward on merit basis and foster for team work. We believe to manage them by leading rather than by driving. We hire the best people for the job and strive to retain, motivate, empower and reward them for their contribution. We are committed to provide an ideal professional environment to enable our employees to pursue the highest possible level of performance.

FHM always gives utmost importance for compliance of applicable Rules and Regulations of Regulators. Also comply with legislative framework of Government regarding submission of return and of taxes and duties etc. FHM also communicates with Government authorities and regulators regarding commercial, policy, regulatory and other relevant matters.

FHM prefers to work with local suppliers in order to support national economy and also save hard earned foreign exchange of the country. Approximately 70% of assets purchased for lease financing are from local suppliers. FHM regularly engage and communicate with suppliers during and after contract. We promote an ethical supplier management relationship in our policy guidelines.

Economic sufficiency, optimal health, and happy relationships are some of the fundamental needs that contribute to our quality of life. FHM supports various trusts and societies who engaged in to provide health facilities and educations to needy communities of societies. Certain portion of profits of FHM has earmarked every year to contribute funds to these trusts and societies.

73

Mapping of Stakeholders of FHM


Whistle Blowing Policy

Whistle Blower is the requirement of new Code of Corporate Governance (CCG). This mechanism encourages and enables employees to raise serious concerns within the management rather than overlooking a problem or 'blowing the whistle' outside. Some time employees are often realize that there is something seriously wrong with the organization. However, they may not express their concerns as they feel that speaking up would be disloyal to their colleagues or to the management.

First Habib Modaraba (FHM) having its corporate objective to work in most transparent manner, address the needs of each and every staff in fulfilling his or her official duties. Since beginning the culture of openness and freedom of speech is well functional at all level of FHM. Senior management having direct relationship with each and every staff and any grievance directly understand by top tier and prompt action taken accordingly.

We also have culture of monthly staff meeting where all the staffs are speak out their problem without any discrimination and top tier management taken strong and concrete steps without single exception.

However, keeping in view of new CCG requirement, the Board of Directors has formulated the mechanism of Whistle Blowing. The policy encourages open discussion of these issues and no one will be disadvantaged as a result of raising in good faith any concerns about compliance with the FHM's Code of Conduct. Under the policy, all disclosures are kept confidential and the identity of the individual making the allegation may be kept confidential so long as it does not hinder or aggravate any investigation.

We have documented whistle blower policy in hand where each staff knows procedures to be adopted in utilizing the whistle blower mechanism. Internal Auditor at times coordinated the whistle blower in investigating the gravity of the incident, and assesses the incident report mechanism for getting resolution of the problem without any further delayed.

The HR department having excellent appraisal and monitoring system in which regular session with respect to dealing with the situation in which whistle blower can be encouraged and benefited for his/her courage. Pre Format Application forms available at each employee desktop in the form of soft copy for easy and prompt access to high management.

All the information kept confidential and shall not be used as against the interest of whistle blower.

74

At FHM, while remaining within our strategy, we further stretch our wings to accelerate growth

momentum which encircle around our following focused business strategies.

¬Focus on enhancing of outreach and penetration towards quality assets building within

sound and stable customer base.

¬Focus on strengthening Shariah governance culture within our operations.

¬Focus to refresh tool of risk management processes particularly credit risk management

in line with latest techniques.

¬Focus on leveraging the power of technology for operational efficiency and delivering of

quality service.

¬Focus to further develop operation capacity of human resource through proper training

and job rotation.

52%Growth in

Certificate of Musharkah

13%Growth in Financing

assets

Focused Strategy

75

Memberships

Management Association of Pakistan (MAP)

Marketing Association of Pakistan (MAP)

Institute of Bankersof Pakistan (IBP)

NBFI & ModarabaAssociation of Pakistan

Islamic Financial Services Board (IFSB)

MALAYSIA

BAHRAIN

International IslamicFinancial Market (IIFM)

First Habib Modaraba having affiliation with

well-reputed International and Local Organization

& Associations 76

The Islamic Financial Services Board (IFSB), is based in Kuala Lumpur,

Malaysia, was officially inaugurated in 2002, The Islamic Financial

Services Board (IFSB) is an international standard-setting organization

that promotes and enhances the soundness and stability of the Islamic

financial services industry by issuing global prudential standards and

guiding principles for the industry, broadly defined to include banking,

capital markets and insurance sectors. The IFSB also conducts research

and coordinates initiatives on industry related issues, as well as

organizes roundtables, seminars and conferences for regulators and

industry stakeholders.

IIFM is the global standardization body for the Islamic Capital & Money

Market segment of the IFSI. Its primary focus lies in the standardization

of Islamic financial products, documentation and related processes.

IIFM was founded with the collective efforts of the Central Bank of

Bahrain, Bank Indonesia, Central Bank of Sudan, Labuan Financial

Services Authority (Malaysia), Autoriti Monetari Brunei Darussalam

and the Islamic Development Bank (a multilateral institution based in

Saudi Arabia).

NBFI & Modaraba Association Of Pakistan was incorporated on 29th

July, 2010 by merging Modaraba Association of Pakistan (MAP) and

Leasing Association of Pakistan (LAP). The total numbers of members

of the Association are 36 (thirty six) which includes 24 modarabas, 12

leasing companies and investment banks.

The Association provides a forum to all members to confer on all issues

of common interest and to formulate joint strategies for their operation.

Management Association of Pakistan was formed in 1964. MAP is the

apex management association of the country. Its mandate is to further

strengthen management thought, practice and advocacy. MAP

provides a platform for exchange of management knowledge and acts

as a bridge between the public and private sectors, management

practitioners and the government. The MAP is a forum at which

national and international economic issues are discussed in their

various events through out the year.

Marketing Association of Pakistan promotes the business interest of its

members and drives growth of the marketing association industry.

To enhance the appreciation of marketing discipline, provision of a

forum to Pakistani marketers for interaction with fellow professionals

and development of a voluntary code of ethics. MAP brings together

persons interested and connected with marketing activities by

arranging professional meetings each month.

The Institute of Bankers Pakistan (IBP) is Pakistan’s only recognized

Institute dedicated to providing technical training services for the

banking industry in the country. The Institute’s mission is to train and

develop a sound human resource base for the financial sector and to

work for continuous learning and professional development of bankers.

77

HM A rd le aF wa s Ca nd r

78

FHM Events CalendarCalendar of Major Events

79

For the financial year ended 30th

June, 2013, the NBFI and Modaraba

Association of Pakistan, has awarded best

performing Modaraba award to FHM within

the Modaraba sector. The FHM has secured 1st

position in above award category.

So far FHM has received 13 awards from NBFI and

Modaraba Association of Pakistan within last 15 years.

81

I n 2 9 t h C o r p o r a t e

Excellence Awards ceremony

held in 22nd August, 2013, the

Management Association of Pakistan

(MAP) has awarded “Certif icate of

Excellence” award to FHM from the category of

Equi ty Investment Inst ruments Sector.

Alhamdulillah, since last six consecutive years FHM

has been receiving this award. So far FHM has

secured five Excellence Certificate Awards and one

Excellence Trophy Award.

83

The Joint Committee of

I n s t i t u t e o f C h a r t e r e d

Accountants of Pakistan (ICAP)

and Institute of Cost & Management

Accountants of Pakistan (ICMAP) in their

ceremony held on 22nd August, 2013 has

awarded “Best Corporate Report Award” to

First Habib Modaraba (FHM) under the category

of NBFCs.

FHM has secured “Second Position”. By the grace of

God, FHM is the only Modaraba in entire Modaraba

sector who has been receiving this award since last four

consecutive years.

85

South Asian Federation of

Accountants (SAFA) in its award

ceremony held in Islamabad, on 3rd

May, 2014, awarded SAFA BPA

“Certificate of Merit” award to FHM from the

category of “Financial Services Sector” for "Best

Presented Accounts" and "Corporate Governance

Disclosures" for the year 2012. Within this sector,

FHM was only nominees from Pakistan. This is fourth

consecutive “Certificate of Merit” award to Habib

Modaraba from SAFA committee.

87

DIM

INIS

HIN

G

MU

SH

AR

AK

AC

AR

-NA

MA

MU

RA

BA

HA

Ijarah is a contract of renting/ hiring/leasing

for usufruct of the assets under which

Modaraba arrange finances for moveable

fixed assets at agreed rental and period with

an undertaking to purchase the assets by

the customer. Rental and Purchase price is

fixed in Advance. LEA

SE

(IJ

AR

AH

)

(Shirkatul Mutanqish) is a type of Shirkah where one partner purchases the other partner’s share gradually. Two partners acquire any asset (vehicle/ machinery/ property) with an intention that one or both partner will use this asset or any one rent out its share in the property to another and sharek undertakes to purchase the share of other partner until it acquires the complete ownership.

The rise in the cost of vehicles has made

buying the car of a difficult reality. Now we

bring a package which reduces your

worries for your huge investment in the car

of your choice. FHM is offering a very

flexible andaffordable car Ijarah-financing

scheme for corporate employees and self-

employed persons who fulfill required

criteria of FHM.

It is contract of sales of goods on

deferred payment basis in which

Modaraba buys the goods and sell them

to the customer of deferred payment

basis. In this transaction, seller i.e.

Modaraba disclose the cost and profit

thereon.

Product Detail

88

Product Detail

CER

TIF

ICA

TE

OF

MU

SH

AR

AK

AM

US

HA

RA

KA

IST

ISN

AS

ALA

MSalam means a contract in which whole

payment made in advance for goods to be

delivered later; thus the contract creates a

liability for the seller. Amount given, as

Salam cannot be called back, unlike Qard.

This is a contractual agreement for

manufacturing goods and commodities,

allowing cash payment in advance and

future delivery or a future payment and

future delivery.

It is a partnership where profit is shared

as per agreed ratio at the inception of

shirkah, while the loss is shared in

proportion of capital investment of each

partner. All the partners are entitled to

participate in the management of the

business.

It is on the basis of this expertise and

know-how that FHM presents a prime

investment opportunity in the form of

Certificate of Musharaka (COM) and

promises best possible returns to

investors with complete security.

89

At FHM we believe that to be successful in the long term

we must continually reassess our competencies,

business strategies and risk management approaches in

order to cope up with day to day business challenges.

We are willing to work towards continuous journey of

success by respecting and valuing of our all partners.

We have aligned our business strategy with large

commitment to corporate responsibility, wellbeing of

employees, customers, communities, environment and

national development for long term sustainability. Working

side by side with our stakeholders, we see clearly that

their success drives our success as we journey together

to prosperity.

We Journey Together to Prosperity

90

Financial Statements

Shariah Advisor’s Review Report

Auditors’ Report to the Certificate Holders

Balance Sheet

Profit & Loss Account

Statement of Comprehensive Income

Cash Flow Statement

Statement of Changes in Equity

Notes to the Accounts

93

96

97

98

99

100

101

102

91

SHARIAH CERTIFICATE FOR FIRST HABIB MODARABA FOR THE PERIOD ENDED JUNE 2014

All Praise is due to Allah, the Cherisher of the worldPeace and Blessings be upon the Prophet of Allah, on his family and all his companions, and on those who

follow him with Iman till the day of Aakhirah

By the Grace of Allah, another active year of the Modaraba was completed with growth. During this year, the Modaraba executed already established Islamic financing products and transactions under the guidance and supervision of Shariah Advisor. During the year, the Sharia Compliance Department (SCD) of First Habib Modaraba held several meetings to review financing products, concepts, transactions, processes and their Shariah-compliance frame work, referred to them by the Sharia Advisor.

As part of the Shariah-compliance framework a full-fledgedShariah Compliance Department (SCD) is working under my supervision. The role of SCD is facilitating product development activities, refining existing products & procedures, performing Shariah compliance reviews of existing product and their agreement, coordinating with Modaraba's management and internal Shariah Auditor. Following were the major developments that took place during the year:

Alhamdulillah, during the year, further improvements were made in the processing, product and Liability side operations as per my directions. The adherence with Shariah and continue growth of modaraba adding value to the Islamic financial institutions palette of the Pakistan.

The DM-Diminishing Musharika was offered to a larger number of clients compared to previous years.

Trained Human Resource is extremely important for the success of Modaraba Industry. To ensure every employee gets proper training, management emphasis to start inhouse shariah training for all staff members.

During the year 2013-14 in-house training sessions were conducted about existing and new products in which most of the relevant employees participated. Such type of training enhances the Islamic financing expertise of the modaraba’s employees. Besides this, the modaraba also nominated its staff in training programs conducted by Center for Islamic Economics (CIE) where renowned scholars share their knowledge especially for Branch Managers.

The Modaraba primarily used Ijarah and Diminishing Musharakah, for its financing activities during the year. It is encouraging to note that the Modaraba has moved towards diversification in the usage of financing products and has reduced the reliance on Ijarah only, as is evident from the Modaraba's financing portfolio. In this context the share of Diminishing Musharika Financing was significantly increased. The Modaraba's total financing portfolio reached Rs.3.9 billion (gross) as of June 30,2014.

On the liability side, the Modaraba offered scheme of Certificate of Musharika (COM) based on the mode of Shirkat. Total COM of the Modaraba increased by 52% and reached a sum of Rs.1.5 billion as at June 30, 2014.

During the year, the modaraba accepted deposits on the mode of Musharakah for short-term liquidity management from individuals and corporate clients. It is heartening to observe that the further improvement has been made in profit payment mechanism to make it more transparent under the direction of Shariah Advisor.

Research & New Product Development

Training & Development

Review of Assets

Review of Liabilities

93

Shariah Audit & Compliance Reviews

Observations

The Shariah Audit function plays a vital role in achieving the objective of ensuring Shariah compliance by evaluating the adherence to Shariah guidelines in each and every activity undertaken by the Modaraba. The Shariah Audit function keeps a continuous check on all activities of the Modaraba.

To strengthen the internal Sharia controls mechanism the management of FHM has started monthly Audit which further enhance the shariah Governance and reduced the day to day shariah operational errors. These audits not only cover the transactions that the departments undertake but also include an evaluation of the Shariah knowledge of staff.

During the year, credit approvals, restructuring of financing facilities, customer-specific transaction process flows and security documents were reviewed to ensure Sharia compliance while offering financing products to the customers.

During the year 2014, facilities were disbursed under Ijarah and Diminishing Musharika to Corporate, SME/Commercial customers and Individuals, it has been witnessed that the major disbursements has been made direct to Suppliers.

In addition to the above-mentioned compliance measures, Sharia audit & compliance review of major portion of transaction were conducted during the year to gain firsthand understanding of the activities being carried out in the Modaraba. An exercise of gauging the basic understanding of the staff about the structures and concepts of Islamic banking & finance was also conducted by way of meetings and on the spot training sessions were also conducted to address any shortcomings identified during the course of such reviews.

Further to note it was witnessed that Ijarah Rental were charged only upon delivery of asset and no rental was charged if assets were not delivered or not in use of customer due to total loss/theft/snatched etc.

The review covered overall Shariah-compliance of the Modaraba's operations and their alignment with the guidelines given by Shariah Advisor and the SECP. In the process, following areas were looked into specially:

• Suppliers' existence was confirmed on sample basis

• Financing Agreements for Ijarah and Diminishing Musharakah were reviewed

• Declarations, description of assets, relevant purchase invoices, sequence and order of the documents were reviewed to obviate the possibility of fictitious transactions

• Transaction Process Flows and Transaction Checklist

• Purchase deeds, treatment of ownership related cost & recovery of rentals in Ijarah transactions

• Ownership ratio in Diminishing Musharakah and issuance of timely unit sale receipts

• Investment made in stock with reference to the stock screening criteria

• Other related documents and procedures followed by different functional areas

• Profit-sharing ratio, profit weightages, projections, and profit distribution mechanism.

• Termination Process of Financing Facilities.

It was observed that on some occasions following in exactitudes has been witnessed that; (1) agreements and documents were not properly filled;(2)missing of information in execution of sale & lease back transactions; (3) On some occasions shariah checklist, credit checklist, process flow and respective approvals omitted; (4) Telephonic client request received instead of written; (5) It is also observed, he FHM efforts towards converting its portfolio from conventional insurance to Takaful, management stance to convert its entire portfolio to takafulis difficult due to weak risk appetite and absorption capacity of Takaful companies and inadequate re-takaful arrangement within the

94

country. Keeping in view of current circumstances of Takaful industry and further opening of Takaful windows with large Insurance companies it is strongly recommended to make effort for the conversion of portfolio from conventional Insurance to Takaful.

An amount of Rs.1,456,155/- was transferred to the Charity Payable Account recovered from customers due to delay in repayment in various financial transactions. I have witnessed the list of charitable institution an amount of Rs.2.0 million was paid from the charity account as per Shariah Guidelines of SECP.

Based on the review of various transactions and operations of the Modaraba, I recommend that:

• Keeping in view of current circumstances of Takaful Industry and further opening of Takaful windows of Insurance Companies it has been highly recommended that FHM should insures its assets through takaful.

• The Modaraba's IT system must be further strengthened to facilitate its customers and compliance mechanism.

• The Modaraba should focus on new innovations and explorethe possibility of entering into more specialized Sharia compliant financing modes such as Murabaha, Salam, Istisna and Musawamah.

• Due care regarding the mind set and commitment towards the cause of Islamic Financing should be taken during the process of hiring of new staff.

• The Modaraba should continue its policy of expansion to spread Islamic Financing and in this regard continue its focus on employees' training related to Islamic Financing products and services and process offered by the Modaraba with specific focus on front line staff.

It is mandatory on the management and employees to ensure application of Sharia principles and guidelines issued by the SECP and Shariah Advisor and to ensure Shariah-compliancein all activities of the Modaraba. The prime responsibility for ensuring Shariah-compliance of the Modaraba's operations thus lies with the management.

Based on the extensive reviews of sample cases for each class of transaction, related documentation, processes, profit distribution mechanism for the depositors and management's representation made in this regard, in my opinion, the affairs, activities and transactions, performed by the Modaraba during the year comply with the rules & principles of Islamic Shariah inlight of the guidelines and directives given by the SECP and myself. Further it is highly appreciated that Modaraba Management and staff are fully committed to adhere the shariah guidelines and directives issued by SECP and Shariah Advisor.

May Allah bless us with the best Tawfeeq to accomplish Hischerished tasks, make us successful in this world and in the Hereafter, and forgive our mistakes.

WassalamAlaikumWaRahmat Allah WaBarakatuh.

Mufti Abdul Sattar LeghariShariah Advisor

Dated: 5th Ramazan–ul–Mubarak 1435 H/July 4, 2014

Charity

Recommendation

Conclusion

95


We have audited the annexed balance sheet of First Habib Modaraba (the Modaraba) as at June 30, 2014 and the related profit and loss account, statement of comprehensive income. cash flow statement and statement of changes in equity together with the notes forming part thereof (hereinafter referred to as the financial statements), for the year then ended and we state that we have obtained all the information and explanations which, to the best of our knowledge and belief, were necessary for the purpose of our audit.

These financial statements are the Modaraba Company’s [Habib Modaraba Management (Private) Limited] responsibility who is also responsible to establish and maintain a system of internal control, and prepare and present the above said statements in conformity with the approved accounting standards as applicable in Pakistan and the requirements of the Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980 (XXXI of 1980), and the Modaraba Companies and Modaraba Rules, 1981. Our responsibility is to express an opinion on these statements based on our audit.

We conducted our audit in accordance with the auditing standards as applicable in Pakistan. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of any material misstatement. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting policies and significant estimates made by the Modaraba Company, as well as, evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion and, after due verification, we report that:

a) In our opinion, proper books of account have been kept by the Modaraba Company in respect of First Habib Modaraba as required by the Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980 (XXXI OF 1980), and Modaraba Companies and Modaraba Rules, 1981;

b) In our opinion:

i) the balance sheet and profit and loss account together with the notes thereon have been drawn up in conformity with the Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980, (XXXI of 1980) and the Modaraba Companies and Modaraba Rules, 1981, and are in agreement with the books of account and are further in agreement with accounting policies consistently applied except for change in accounting policy as stated in note 4.1 to the accompanying financial statements, with which we concur;

ii) the expenditure incurred during the year was for the purpose of the Modaraba’s business and

iii) the business conducted, investment made, and the expenditure incurred during the year were in accordance with the objects, terms and conditions of the Modaraba;

c) In our opinion and to the best of our information and according to explanations given to us, the balance sheet, profit and loss account, statement of comprehensive income, cash flow statement and statement of changes in equity together with the notes forming part thereof confirm with the approved accounting standards as applicable in Pakistan and give the information required by the Modaraba companies and the Modaraba (Floatation and Control) Ordinance ,1980 (XXXI of 1980) and the Modaraba Companies and the Modaraba Rules,1981 in the manner so required and respectively give a true and fair view of the state of the Modaraba’s affairs as at June 30, 2014 and of the profit, its cash flows and changes in equity for the year then ended; and

d) In our opinion, Zakat deductible at source under the Zakat and Ushar Ordinance, 1980 (XVIII of 1980), was deducted by the Modaraba and deposited in the Central Zakat Fund established under Section 7 of that Ordinance.

Certificate HoldersAuditors’ Report To The

Muniff Ziauddin & Co.Chartered Accountants

Engagement PartnerMuhammad Moin Khan

Karachi : July 23, 2014

96


2014 2013Note

--------------------Rupees----------------------

As at June 30, 2014

ASSETSNON-CURRENT ASSETS

Fixed assets - tangibleIjarah (lease) assets 5 2,868,616,976 2,941,637,969Assets in own use 5.2 11,204,147 13,427,992

2,879,821,123 2,955,065,960Intangible assets 6 1,500,691 1,409,165Diminishing musharaka financing 7 616,572,857 355,467,154Long term advances, deposits and prepayments 8 1,200,050 2,492,650

3,499,094,721 3,314,434,929CURRENT ASSETS

Investments 9 975,232,743 997,145,487Current portion of diminishing musharaka financing 7 444,546,723 191,350,842Ijarah (lease) installments receivable 10 9,915,676 3,520,410Advances and short term prepayments 11 8,455,814 11,318,384Other receivables 12 53,303,169 32,973,716Tax refund due from Government 13 31,314,018 37,903,024Cash and bank balances 14 371,131,886 130,639,915

1,893,900,029 1,404,851,777TOTAL ASSETS 5,392,994,749 4,719,286,707

EQUITY AND LIABILITIESCAPITAL AND RESERVES

Certificate capital :Authorized

220,000,000 (2013: 220,000,000)certificates of Rs. 5/- each 1,100,000,000 1,100,000,000

Issued, subscribed and paid-up capital 15 1,008,000,000 1,008,000,000Reserves 16 2,200,619,366 2,044,851,536

Certificate holders' equity 3,208,619,366 3,052,851,536

NON-CURRENT LIABILITIESSecurity deposits against ijarah (lease) assets 17 290,104,583 264,938,447

CURRENT LIABILITIESCertificates of musharaka 18 1,533,668,767 1,007,807,729Security deposits - current portion 17 81,132,842 54,685,080Unearned ijarah (lease) and diminishing musharaka installments 3,979,895 27,255,215Advance ijarah (lease) and diminishing musharaka installments 32,471,878 19,804,076Trade and other payables 19 188,147,386 249,042,452Profit payable on certificate of musharaka 28,379,755 18,602,889Taxation 2,790,833 2,790,833Unclaimed profit distribution 23,699,444 21,508,450

1,894,270,800 1,401,496,724CONTINGENCIES AND COMMITMENTS 20TOTAL EQUITY AND LIABILITIES 5,392,994,749 4,719,286,707

The annexed notes 1 to 43 form an integral part of these financial statements.

DIRECTORCHIEF EXECUTIVE DIRECTOR

Balance Sheet

97


2014 2013Note

--------------------Rupees----------------------

Profit And Loss AccountFor the year ended June 30, 2014 Re-stated

Income from ijarah (leasing) 21 297,916,695 316,683,782

Profit on diminishing musharaka financing 93,591,278 49,166,023

391,507,973 365,849,805

Administrative expenses 22 (70,750,329) (67,723,800)

320,757,644 298,126,005

Other income 23 124,150,840 955,770,578

Other operating charges 24 (651,171) (740,800)

444,257,313 1,253,155,783

Financial charges 25 (114,767,714) (102,499,415)

329,489,599 1,150,656,368

Modaraba Management Company's remuneration (32,948,960) (115,023,395)

26 (5,271,834) (22,568,120)

291,268,805 1,013,064,853

Wokers Welfare Fund (5,825,376) (20,261,297)

Profit before taxation 285,443,429 992,803,556

Taxation - -

Profit for the year 285,443,429 992,803,556

Earnings per certificate - basic and diluted 37 1.42 4.92


Services sales tax on Managemet Company's remuneration


98


2014 2013

--------------------Rupees----------------------

Re-stated

Statement Of Comprehensive IncomeFor the year ended June 30, 2014

Profit for the year 285,443,429 992,803,556

Movement in available for sale investments 71,152,023 (864,422,907)

Acturial gain/(loss) on defined benefit plan 772,378 (422,419)

Total comprehensive income for the year 357,367,830 127,958,230



99


2014 2013Note

--------------------Rupees----------------------

For the year ended June 30, 2014 Re-stated

Cash Flow Statement

Cash flow from operating activities

Cash generated from operations 39 1,505,079,519 1,491,382,034

Purchase of ijarah (lease) assets (1,400,901,865) (1,889,712,152)

Proceeds from sale of ijarah (lease) assets 281,632,637 302,262,670Diminishing musharaka financing - net (514,301,584) (164,380,665)

Musta'jir's security deposits:Received 119,354,126 134,367,098

Refunded / adjusted (67,740,228) (81,703,793)Net Musta'jir's security deposits 51,613,898 52,663,305

Financial charges paid (104,789,343) (115,521,249)Gratuity paid (895,719) (1,868,594)

Net cash outflow from operating activities (182,562,458) (325,174,651)

Cash flow from investing activities

Purchase of owned assets (including intangibles) (5,030,800) (9,845,156)

Proceeds from disposal of owned assets 1,497,081 364,950

Purchase of investments - available for sale (7,143,406) (12,338,388)Investment in Islamic investment certificate - 300,000,000

Investment in Ijarah Sukuk bonds - (800,160,000)Redemption of Sukuk bonds 100,160,000 -

Proceeds from disposal of investments 47,259 916,923,747Dividend received 5,779,663 100,837,606

Long-term advances, deposits and prepayments 1,292,600 (975,800)Net cash generated from investing activities 96,602,397 494,806,959

Cash flow from financing activities

Profit distribution paid (199,409,006) (199,903,250)Certificates of musharaka 525,861,038 38,516,770

Net cash inflow / (outflow) from financing activities 326,452,032 (161,386,480)Net increase in cash and cash equivalents 240,491,971 8,245,828

Cash and cash equivalents at the beginning of the year 130,639,915 122,394,087Cash and cash equivalents at the end of the year 371,131,886 130,639,915



100


--------------------Rupees----------------------

For the year ended June 30, 2014Re-stated

Statement Of Changes In Equity

Certificate Certificate Statutory General Unrealized gain Unappropriated Totalcapital premium reserve reserve on investments profit reserves Total

Balance as at July 01, 2012 1,008,000,000 378,000,000 578,891,321 50,000,000 901,105,975 210,496,010 2,118,493,306 3,126,493,306

- - - - - (201,600,000) (201,600,000) (201,600,000)

Total comprehensive income for the

year - Restated - - - - (864,422,907) 992,381,137 127,958,230 127,958,230

Transfer to statutory reserve at 20% -Restated - - 198,560,711 - - (198,560,711) - -

Balance as on June 30, 2013 - Restated 1,008,000,000 378,000,000 777,452,032 50,000,000 36,683,068 802,716,436 2,044,851,536 3,052,851,536

Balance as on July 01, 2013 1,008,000,000 378,000,000 777,452,032 50,000,000 36,683,068 802,716,436 2,044,851,536 3,052,851,536

-

-

-

-

-

-

- -

-

(201,600,000) (201,600,000) (201,600,000)

Transfer to general reserve 590,000,000 (590,000,000) - -

Total comprehensive income for the year - - - - 71,152,023 286,215,807 357,367,830 357,367,830

Transfer to statutory reserve at 20% - - 57,088,686 - - (57,088,686) - -

Balance as at June 30, 2014 1,008,000,000 378,000,000 834,540,718 640,000,000 107,835,091 240,243,557 2,200,619,366 3,208,619,366

Capital reserves Revenue Reserves

Profit distribution for the year endedJune 30, 2012 at 20%

Profit distribution for the year endedJune 30, 2013 at 20%



101


For the year ended June 30, 2014NOTES TO THE FINANCIAL STATEMENTS

1 STATUS AND NATURE OF BUSINESS

2 BASIS OF PREPARATION

2.1 Statement of compliance

2.2 Basis of measurement

2.3 Functional and presentation currency

2.4 Significant accounting estimates and judgments

First Habib Modaraba (the Modaraba) is a perpetual, multi-purpose modaraba floated and managed by Habib Modaraba Management (Private) Limited (the Modaraba Management Company) having its registered office at 5th Floor, HBZ Plaza, I.I. Chundrigar Road, Karachi. The Modaraba is listed on the Karachi, Lahore and Islamabad stock exchanges of Pakistan. The Modaraba is engaged in the business of leasing (Ijarah), Musharaka, Murabaha financing and other related business.

These financial statements have been prepared in accordance with approved accounting standards as applicable in Pakistan and the requirements of Modaraba Companies and Modarabas (Floatation and Control) Ordinance, 1980, Modaraba Companies and Modaraba Rules, 1981 and Prudential Regulations for Modarabas (hereinafter referred to as the relevant laws). Approved accounting standards comprise such International Financial Reporting Standards (IFRS) / International Accounting Standards (IAS) as notified under the provisions of the Companies Ordinance, 1984. Wherever, the requirements of relevant laws or directives issued by the Securities and Exchange Commission of Pakistan (SECP) differ with the requirements of these standards, the requirements of the relevant laws and the said directives take precedence.

The SECP has issued directive (vide SRO 431 (I) / 2007 dated May 22, 2007) that Islamic Financial Accounting Standard 2 (IFAS-2) shall be followed in preparation of the financial statements by Companies and Modarabas while accounting for Ijarah (Lease) transactions as defined by the said standard. The Modaraba has adopted the said standard.

These financial statements have been prepared on the historical cost basis except for the measurement at fair value of certain financial instruments in accordance with the requirements of IAS-39 "Financial Instruments: Recognition and Measurement", wherever applicable.

Permissible Islamic financial products including Murabaha (as a liability) and Musharaka have been used by the Modaraba, in line with similar industry practices. The accounting and presentation of the same are in line with the substance of the transaction and are limited to the extent of actual amount of facility utilized and mutually agreed mark-up / profit thereon. Accordingly, purchases, sales and Musharaka profits / reserves are not reflected in these financial statements except for Murabaha facility (as an asset) which has been accounted for in line with Islamic Financial Accounting Standard - 1.

The Securities and Exchange Commission of Pakistan (SECP) has directed that Islamic Financial Accounting Standard 2 shall be followed in regard to the financial statements by companies and modarabas while accounting for Ijarah (Lease) transactions as defined by the said standard.

These financial statements have been prepared following accrual basis of accounting except for cash flow information.

These financial statements have been presented in Pakistan Rupees, which is the functional and presentation currency of the Modaraba.

The preparation of financial statements in conformity with approved accounting standards requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Modaraba’s accounting policies. Estimates and judgments are continually evaluated and are based on historic experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Revisions to accounting estimates are recognized in the period in which the estimate is revised and in any future period effected. In the process of applying the Modaraba’s accounting policies, management has made the following estimates and judgments which are significant to the financial statements:

102


2.5 Useful lives, pattern of flow of economic benefits and impairment

2.6 Staff retirement benefits

2.7 Provisions against non performing financing (Suspense income)

3 NEW STANDARDS, INTERPRETATIONS AND AMENDMENTS TO PUBLISHED APPROVED ACCOUNTING STANDARDS

Estimates with respect to residual values and depreciable lives and pattern of flow of economic benefits are based on the analysis by the management of the Modaraba. Further, the Modaraba reviews the value of the assets for possible impairment on an annual basis and any change in the estimates in the future might affect the carrying amount of respective item of property, plant and equipment, with a corresponding effect on the depreciation charge and impairment.

Certain actuarial assumptions have been adopted as disclosed in note 19.3 to the financial statements for valuation of present value of defined benefit obligations and fair value of plan assets. Any changes in these assumptions in future years might effect unrecognized gains and losses in those years.

The Modaraba reviews its overdue Ijarah (lease) installments at each reporting date to assess whether provision should be recorded in the profit and loss account, in addition to the mandatory provisions required in accordance with the Prudential Regulations issued by the SECP. In particular, judgment by management is required in the estimation of the amount and timing of future cash flows when determining the level of provision required. Such estimates are based on assumptions regarding a number of factors and actual results may differ, resulting in future changes to the provisions.

Standards, interpretations and amendments to approved accounting standards that are not yet effective

The following revised standards, amendments and interpretations with respect to the approved accounting standards would be effective from the dates mentioned below against the respective standard or interpretation:

Standard, Interpretation or Amendment "Effective date (annual periods beginning on or after) "

IFRIC 21 An interpretation on the accounting for levies imposed by governments January 1, 2014

IAS 32 Offsetting Financial Assets and Financial Liabilities - (Amendment) January 1, 2014

IAS 36 Impairment of Assets - (Amendment) January 1, 2014

IAS 39 Financial Instruments: Recognition and Measurement (Amendment) January 1, 2014

IAS 19 Employee Benefits (Amendment) January 1, 2014

The Modaraba expects that the adoption of the above amendments and interpretations will not affect its financial statements in the period of initial application.

The following new standards have been issued by the IASB and notified by the SECP for application in Pakistan but their applicability start form the annual period beginning on or after January 01, 2015.

Standard or Interpretation "IASB Effective date (annual

periods beginning on or after) "

IFRS 10 Consolidated Financial Statements January 01, 2013

IFRS 11 Joint Arrangements January 01, 2013

IFRS 12 Disclosure of Interests in Other Entities January 01, 2013

IFRS 13 Fair Value Measurement January 01, 2013

Standards, ammendments and interpretations to be published approved accounting standards that are effective in the current year.

The following standards, amendments and interpretations are effective for the accounting period beginning on or after January 1, 2013. However, these are not either not relevant to the Modaraba's operation or are not expected to have significant impact on the Modaraba's financial statements other than certain additional disclosures.

103


- Amendmnets to IAS 1- Presentation of financial statements- Clarification of requirements for comparative information.

- Amendments to IAS 16- Property, Plant and Equipment- Classification of servicing equipment.

- Amendments to IAS 32- Financial Instruments: Presentation - Tax effects of distribution to holder of equity instrument, and transaction costs of an equity transactions.

- Amendments to IAS 34- Interim Financial Reporting- Interim reporting of segment information for total assets and total liabilities.

- IFRIC 20- Stripping cost in the Production Phase of a Surface Mine.

The Modaraba has adopted the amended accounting standards which become effective during the year. Other than this, the accounting policies adopted in the preperation of these financial statements are consistent with those of the previous financial year.

During the year (with effect from January 01, 2013) the Modaraba has adopted IAS 19, (Revised) 'Employee Benefits'. The amendments in the revised standard require the Modaraba to eliminate the corridor approach and recognize all actuarial gains and losses (now called ‘remeasurements’ that result from the remeasurements of defined benefit obligations and fair value of plan assets at the balance sheet date) in other comprehensive income as they occur, immediately recognize all past service costs and replace interest cost and expected return on plan assets with an interest amount that is calculated by applying the discount rate to the net defined benefits liability / asset.

Previously the company accounted for the actuarial gain/loss with respect to actuarial valuation of its retirement benefit plan immediately in the relevant period. Since the company has already accounted for the actuarial gain / loss and the liability was fully recorded hence there is no impact of it in the balance sheet.

The change in accounting policy has been applied retrospectively. The effect of the change in the accounting policy on the current and the prior period financial statements have been summarized below:

4 SIGNIFICANT ACCOUNTING POLICIES

4.1 Change in accounting policy

(772,378) 422,418

772,378 (422,418)

(Increase) /Decrease in adminstrative expenses

Impact on Other Comprehensive Income

Recognition of Acturial gain/ (loss)

Impact on Profit and Loss Account

2014 2013-----------------------Rupees-------------------------

4.2 Revenue recognition

Ijarah (lease) installments are recognized on accrual basis.

Income from Murabaha is accounted for on consummation of Murabaha transaction. However, profit on that portion of revenue not due for payment (deferred Murabaha income) is deferred and recognized on a time proportionate basis.

Income on diminishing musharaka financing is recognized on accrual basis.

Income on Sukuk bond is recognized on accrual basis.

Dividend income is recognized when the right to receive the dividend is established.

Return on deposit accounts is recognized on accrual basis.

Gain / (loss) on available-for-sale investments is recognized at the time of disposal of investment.

104


4.3 Fixed assets – Tangible

(a) Ijarah (lease) assets

(b) Assets in own use

(c) Gain or loss on disposal

(d) Impairment

4.4 Intangible assets

4.5 Financial assets

Ijarah (lease) assets are stated at cost less accumulated depreciation. Depreciation is charged to income applying the straight line method whereby the cost of an asset less salvage value is written off over the ijarah (lease) period, which is considered to be the estimated useful life of the asset. In respect of additions and disposals during the year, depreciation is charged proportionately from the date of delivery of assets to the date of its maturity / termination.

These are stated at cost less accumulated depreciation. Depreciation is charged to income applying the straight line method whereby the cost of an asset is written off over its estimated useful life. In respect of additions and disposals during the year, depreciation is charged proportionately for the period of use.

Maintenance and normal repairs are charged to income as and when incurred. Major renewals and improvements are capitalized if the recognition criteria are met.

The carrying values are reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable.

The assets’ residual values, useful lives and depreciation methods are reviewed, and adjusted if appropriate, at each year end.

Gain or loss on disposal of assets, if any, is recognized as and when incurred.

The Modaraba assesses at each balance sheet date whether there is any indication that assets excluding inventory may be impaired. If such indication exists, the carrying amounts of such assets are reviewed to assess whether they are recorded in excess of their recoverable amounts. Where the carrying value exceeds the recoverable amount, assets are written down to the recoverable amount and the difference is charged to the profit and loss account.

These are stated at cost less accumulated amortization and impairment, if any.

Amortization is charged to income applying the straight line method whereby the cost of an asset is written off over its estimated useful life. In respect of additions and disposals during the year, amortization is charged proportionately for the period of use.

Financial assets in the scope of IAS 39, are classified as either financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments and available-for-sale financial assets, as appropriate. When financial assets are recognized initially, they are measured at fair value, plus, in the case of investments not at fair value through profit or loss, directly attributable transaction cost. The Modaraba determines the classification of its financial assets after initial recognition and, where allowed and appropriate, re-evaluates this designation at each financial year-end.

i) Financial assets at fair value through profit or loss

Financial assets classified as held for trading are included in the category ‘Financial assets at fair value through profit or loss’. Financial assets are classified as held for trading if they are acquired for the purpose of selling in the near term. Derivatives, if any, are also classified as held for trading unless they are designated as effective hedging instruments. Gains or losses on investments held for trading are recognized in profit and loss account.

ii) Held-to-maturity

Non-derivative financial assets with fixed or determinable payments and fixed maturity are classified as held-to-maturity when the Modaraba has the positive intention and ability to hold to maturity. Investments intended to be

105


held for an undefined period are not included in this classification. Other long-term investments, that are intended to be held-to-maturity, are subsequently measured at amortized cost.

This cost is computed as the amount initially recognized minus principal repayments, plus or minus the cumulative amortization, using the effective interest rate method, of a difference between the initially recognized amount and the maturity amount. This calculation includes all fees and charges paid or received between parties to the contract that are an integral part of the effective interest rate, transaction cost and all other premiums and discounts. For investments carried at amortized cost, gains and losses are recognized in profit and loss account when the investments are derecognized or impaired, as well as, through the amortization process.

iii) Loans and receivables

Loans and receivables are non derivative financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are carried at amortized cost using the effective interest rate method. Gains and losses are recognized in profit and loss account when the loans and receivables are derecognized or impaired, as well as, through the amortization process.

iv) Available-for-sale

Available-for-sale financial assets are those non derivative financial assets that are designated as available-for-sale or are not classified in any of the three preceding categories. After initial recognition available-for-sale financial assets are measured at fair value with gains and losses being recognized as a separate component of equity until the investment is derecognized or until the investment is determined to be impaired at which time the cumulative gain or loss previously reported in equity is included in the profit and loss account.

The fair value of investments that are actively traded in organized financial markets is determined by reference to quoted market bid price at the close of business on the balance sheet date. For investments where there is no active market, value is determined using valuation techniques.

All ‘regular way’ purchases and sales of quoted equity securities are recognized on the trade date i.e. the date that the Modaraba commits to purchase / sell the asset. ‘Regular way’ purchases or sales of quoted investments require delivery within three working days after the transaction date as per stock exchange regulations.

Financial liabilities are classified according to the substance of the contractual arrangements entered into. Significant financial liabilities are security deposits against Ijarah (lease) assets declared, unclaimed profit distribution and other liabilities.

Financial assets are recognized initially at fair value or in case of financial assets that are not carried at fair value through profit or loss, at fair value plus transaction cost.

All financial assets and liabilities are recognized at the time when the entity becomes party to the contractual provisions of the instrument and are recognized in case of assets, when the contractual rights under the instrument are recognized, expired or surrendered and in case of a liability, when the obligation is discharged, cancelled or expired.

Any gain / (loss) on the recognition and derecognition of the financial assets and liabilities is included in the profit / (loss) for the period in which it arises.

Assets and liabilities that are not of contractual nature and that are created as a result of statutory requirements imposed by the Government are not financial instruments of the Modaraba.

Financial assets and liabilities are offset and the net amount is reported in the balance sheet when there is a legally enforceable right to set-off the recognized amounts and the Modaraba intends to either settle on a net basis, or to recognize the asset and settle the liability simultaneously.

4.6 Trade date accounting

4.7 Financial liabilities

4.8 Recognition and derecognition of financial instruments

4.9 Offsetting of financial assets and financial liabilities

106


4.10 Ijarah (lease) installments and Murabaha finance receivables

4.11 Cash and cash equivalents

4.12 Finance arrangements including certificates of musharaka

4.13 Staff retirement benefits

4.14 Compensated absences

4.15 Taxation

Ijarah (lease) installments and Murabaha finance receivables are stated net of provision and suspense income. Provision is recognized for Ijarah (lease) installments receivable, in accordance with the Prudential Regulations for Modarabas. Bad debts are written-off when identified.

Cash and cash equivalents are carried at cost.

For the purpose of the cash flow statement, cash and cash equivalents consist of cash in hand, balances at banks in current and deposit accounts and stamps in hand.

These are carried on the balance sheet at their principal amount.

Profits on these arrangements are recognized as expense in the period in which they are incurred.

Profit on Musharaka finance is accounted for on the basis of the projected rate of profit. The effect of adjustments, if any, between actual rate and projected rate of profit is accounted for at the end of each year after determination of the actual rate.

(a) Gratuity scheme

The Modaraba operates a gratuity scheme for all eligible employees who have completed the minimum qualifying period of service. The scheme is administered by the Trustees nominated under the Trust Deed. The contributions to the scheme are made in accordance with actuarial valuation using Projected Unit Credit Method.

Actuarial gains and losses arising at each valuation date are recognized immediately.

(b) Provident fund

The Modaraba also operates an approved funded contributory provident fund scheme for all its employees who are eligible under the scheme. Equal monthly contributions at the rate of 10 percent of basic salary are made by the Modaraba and the employees.

The Modaraba accounts for these benefits in the period in which the absences are earned.

Current

Provision for current taxation is made on taxable income at the prevailing rates of tax after taking into account tax credits available, if any. Under clause 100 of Part - I of the Second Schedule to the Income Tax Ordinance, 2001, the income of non-trading modarabas is exempt from tax provided that not less than 90 percent of their profits are distributed to the certificate holders.

Deferred

The Modaraba accounts for deferred taxation on all material temporary differences using the liability method arising between the amounts attributed to assets and liabilities for financial reporting purposes and financial statements used for taxation purposes. However, deferred tax liability has not been provided in these financial statements as the management believes that the future income of Modaraba will not be taxable in the foreseeable future due to the fact that the Modaraba intends to continue availing the tax exemption through profit distribution to the extent of 90 percent of distributable profit.

107


4.16 Provisions

4.17 Profit distribution and other appropriations of profit

4.18 Related party transactions

Provisions are recognized when the Modaraba has a present legal or constructive obligation as a result of past events and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate of the obligation can be made.

Profit distribution and other appropriations of profit are recognized in the year in which these are approved. Transfer to statutory reserve and any of the mandatory appropriations as may be required by law are recognized in the period to which these relate.

All transactions with the related parties are priced on arm’s length basis. Prices for those transactions are determined on the basis of admissible valuation methods.

5 IJARAH (LEASE) ASSETS

Ijarah (lease) assets 5.1 2,704,571,676 2,502,492,870

Advance against ijarah (lease) assets 5.1.1 164,045,300 439,145,099

2,868,616,976 2,941,637,969

2014 2013Note-----------------------Rupees-------------------------

5.1 Ijarah (lease) assets

Plant, machineryand equipment 888,742,978 204,100,516 762,608,753 497,541,640 191,642,073 389,940,792 8,028,061 364,639,900 8.33 to 50

(330,234,741) (299,242,921)

Vehicles 3,525,994,153 1,471,847,326 4,108,560,842 1,406,674,561 1,020,319,736 1,768,629,066 - 2,339,931,775 15 to 33.33

(889,280,637) (658,365,231)

4,414,737,131 1,675,947,842 4,871,169,595 1,904,216,201 1,211,961,809 2,158,569,858 8,028,061 2,704,571,676(1,219,515,378) (957,608,152)

Plant, machineryand equipment 1,061,709,906 234,030,076 888,742,978 576,915,350 274,606,437 497,541,640 8,028,061 383,173,277 8.33 to 50

(406,997,004) (353,980,147)

Vehicles 3,054,755,930 1,535,354,797 3,525,994,153 1,349,187,299 891,404,724 1,406,674,561 - 2,119,319,592 15 to 33.33(1,064,116,574) (833,917,462)

4,116,465,836 1,769,384,873 4,414,737,131 1,926,102,649 1,166,011,161 1,904,216,201 8,028,061 2,502,492,869(1,471,113,578) (1,187,897,609)

Charge / (adjustments) for

the year

June 30, 2014

C O S T D E P R E C I A T I O N

ImpairmentWritten down

value as at June 30, 2014

Rate of depreciation %

As at June 30, 2014

ParticularsAs at

July 01, 2013

Additions / (disposals)

during the year

As at June 30, 2014

As at July 01, 2013


the year

June 30, 2013


ImpairmentWritten down

value as at June 30, 2013

Rate of depreciation %

As at June 30, 2013

ParticularsAs at

July 01, 2012


during the year

As at June 30, 2013

As at July 01, 2012

-------------------------------------------------------------Rupees----------------------------------------------------------------

-------------------------------------------------------------Rupees----------------------------------------------------------------

5.1.1 Advance against ijarah (lease) assets

The ijarah (lease) assets cost includes an amount of Rs.164.045 million (2013: Rs.439.145 million) relating to advance against ijarah (lease) assets which have not yet been delivered to Mustajirs.

108


5.2 Assets in own use

Office equipment 12,490,609 1,040,037 13,203,846 6,630,340 2,907,251 9,253,302 3,950,544 25 to 33.33

(326,800) (284,288)

Furniture and fixture 8,626,915 414,604 8,649,519 6,965,759 632,860 7,352,604 1,296,915 20(392,000) (246,015)

Vehicles 8,503,349 2,635,500 8,932,349 2,596,782 1,301,992 2,975,660 5,956,689 16.67(2,206,500) (923,114)

29,620,873 4,090,141 30,785,714 16,192,881 4,842,102 19,581,567 11,204,147(2,925,300) (1,453,416)

Office equipment 9,624,902 4,283,087 12,490,609 5,718,105 2,314,317 6,630,340 5,860,269 25 to 33.33(1,417,380) (1,402,082)

Furniture and fixture 8,257,446 813,269 8,626,915 6,753,472 656,073 6,965,759 1,661,156 20(443,800) (443,786)

Vehicles 9,782,063 4,660,628 8,503,349 7,153,626 1,382,490 2,596,782 5,906,567 16.67(5,939,342) (5,939,334)

27,664,411 9,756,984 29,620,873 19,625,203 4,352,880 16,192,881 13,427,992(7,800,522) (7,785,202)

June 30, 2014C O S T D E P R E C I A T I O N

Written down value as at

June 30, 2014Rate of

depreciation %Particulars

As at July 01, 2013


during the year

As at June 30, 2014

As at July 01, 2013


the year

As at June 30, 2014

-------------------------------------------------------------Rupees----------------------------------------------------------------

June 30, 2013C O S T D E P R E C I A T I O N




As at July 01, 2012


during the year

As at June 30, 2013

As at July 01, 2012


the year

As at June 30, 2013

-------------------------------------------------------------Rupees----------------------------------------------------------------

5.3 Disposal of assets in own use

Mode of Particulars ofdisposal purchaser

Motor vehicle 1,537,500 254,115 1,283,385 1,283,385As per Company

policyFayyaz Hussain

Qazi

Motor vehicle 669,000 668,999 1 -As per Company

policyImran Khan

Furniture & Fixture 142,000 141,988 12 18,700 QuotationPak Beauty Furnishing

Karachi

Furniture & Fixture 225,000 79,027 145,973 145,973As per Company


Qazi

Furniture & Fixture 25,000 24,999 1 -As per Company

policyTehsin Abbas

Office Equipment 50,000 11,977 38,023 38,023As per Company


Qazi

Office Equipment 264,400 264,389 11 11,000 QuotationPrint Tech.

Karachi

Office Equipment 602,054 597,552 4,502 - Scrap

3,514,954 2,043,046

CostAccumulated depreciation

Net book value Sale proceeds

----------------------------------------Rupees-------------------------------------------

1,471,908 1,497,081

109


6 INTANGIBLE ASSETS

Computer software - 2014 2,978,780 940,659 3,329,785 1,569,615 849,109 1,829,094 1,500,691

(589,654) (589,630) 33.33





As at July 01, 2013


during the year

As at June 30, 2014

As at July 01, 2013


the year

As at June 30, 2014

-------------------------------------------------------------Rupees----------------------------------------------------------------

7 DIMINISHING MUSHARAKA FINANCING

Secured

Diminishing musharaka financing 7.1 1,012,672,680 369,309,326Less: Current portion shown in current assets (444,546,723) (191,350,842)

568,125,957 177,958,484Advance against diminishing musharaka financing 48,446,900 177,508,670

616,572,857 355,467,154

7.1

8 LONG-TERM ADVANCES, DEPOSITS AND PREPAYMENTS

Advances - 508,800

Long-term deposits

Security deposit to Central Depository Company of Pakistan Limited 150,000 150,000

Security deposit of Lahore office 120,000 120,000Security deposit of Islamabad office 130,000 130,000

Security deposit to Habib Metropolitan Bank for locker 70,000 70,000Miscellaneous deposits 65,850 64,850

535,850 534,850 Prepayments

Prepaid rent 664,200 1,449,0001,200,050 2,492,650

This represents diminishing musharaka financing for a term of 1 to 5 years.

2014 2013Note-----------------------Rupees-------------------------

9 INVESTMENTS

Available for saleInvestment in shares 9.1 146,192,743 96,985,487Investment in Ijarah Sukuk bonds 9.2 829,040,000 900,160,000

975,232,743 997,145,487

2014 2013Note-----------------------Rupees-------------------------

2014 2013-----------------------Rupees-------------------------

2,890,608 88,172 2,978,780 765,049 804,566 1,569,615 1,409,165 33.332013

110


9.1 Investment in shares

2014 2014 2013 2013Carrying Carrying

Shares of listed companies Name of company Averagevalue at fair

valueAverage

value at fair value

cost (Market price) cost (Market price)

Automobile and Parts

330 330 Pak Suzuki Motor Company Limited 1,750 90,384 1,750 49,078

Banks

2,010,555 2,010,555 Bank Islami Pakistan Limited 10,157,636 19,824,072 10,157,636 13,088,7131,082,992 1,082,992 Meezan Bank Limited 15,490,038 46,828,574 15,490,038 31,406,768

Equity Investment Instrument

5,000 5,000 Al-Meezan Mutual Fund Limited 43,690 68,350 43,690 80,0005,000 5,000 Meezan Balanced Fund 39,090 66,050 39,090 64,900

Pharma and Bio Tech

1,000 1,000Abbott Laboratories (Pakistan) Limited 46,348 572,320 46,348 328,090

Chemicals

- 334 Akzo Nobel Pakistan Limited - - 45,369 20,083- 110 Gatron (Industries) Limited - - 2,805 18,810665 665 ICI Pakistan Limited 90,062 259,576 90,062 110,676

Food Producers

602,857 602,857 Habib Sugar Mills Limited 11,109,831 22,004,281 11,109,831 14,239,482

Telecommunication

5,000 5,000 Pakistan Telecommunication Limited 76,788 127,350 76,788 110,950

Oil and Gas

3,168 2,880 Pakistan State Oil Company Limited 294,463 1,231,877 294,463 922,694239,698 168,749 Pakistan Petroleum Limited 29,640,234 53,773,849 22,496,828 35,703,913

2,000 2,000 145,640 522,560 145,640 457,5001,000 1,000 Mari Petroleum Company Limited 95,691 373,430 95,691 136,570

Cement

1,000 1,000 Lucky Cement 126,129 410,300 126,129 209,720

Fertilizer

1,000 1,000 Fauji Fertilizer Bin Qasim 40,262 39,770 40,262 37,540

67,397,652 146,192,743 60,302,420 96,985,487

9.2 Investment in Ijarah Sukuk bonds

Investment in sukuk 800,000,000 829,040,000 900,160,000 900,160,000

2014 2013Number of shares

Oil and Gas Development Company Limited

-----------------------Rupees-------------------------

9.2.1 These Sukuk Bonds are issued by the Government of Pakistan with the maturity term of 3 from the date of issue. The profit on the Sukuk shall be paid semi-annualy on the basis of rental rate announced by the State Bank of Pakistan prior to start of each half year. The Modaraba has obtained permission from Registrar of Modarabas to treat the investment as part of redemption reserve fund to be set aside by the Modaraba to comply with the requirements of the Registrar of Modarabas for the issuance of certificate of Musharaka

111


10 IJARAH (LEASE) INSTALLMENTS RECEIVABLE

Secured - considered goodIjarah (lease) installments due 11,808,772 5,415,105

Suspense ijarah (lease) installments 10.1 (1,893,096) (1,894,695)9,915,676 3,520,410

10.1

11 ADVANCES AND SHORT TERM PREPAYMENTS

Advances 5,965,428 9,466,145Short term prepayments 2,490,386 1,852,239

8,455,814 11,318,384

12 OTHER RECEIVABLES

Unsecured - considered goodProfit receivable on modaraba deposit accounts 2,720,553 7,369,198Profit receivable on Ijarah Sukuk bond 20,152,910 11,693,762Advance tax 29,105,854 13,663,843

Registration charges receivable 712,110 212,867Other receivables 611,742 34,046

53,303,169 32,973,716

13 TAX REFUND DUE FROM GOVERNMENT

Income tax refundable 31,314,018 37,903,024

31,314,018 37,903,024

Suspense ijarah (lease) installments represent amounts overdue on ijarah (lease) assets.

2014 2013Note-----------------------Rupees-------------------------

14.1

14.2

14.3

The profit on the above modaraba deposit account ranges between 5.48% per annum (2013: 5.25% to 5.75% per annum).

The profit on the above modaraba deposit account ranges between 7.56% to 9.02% per annum (2013: 8.25% to 10.50% per annum).

The profit on the above redemption fund account ranges between 7.56% to 9.02% per annum (2013: 8.25% to 10.50% p.a)

14 CASH AND BANK BALANCES

Stamps in hand 483,421 117,521Cash at banks Current account

State Bank of Pakistan 58,740 126,215 With other banks 680,941 446,994

Deposit accountsModaraba Deposit account Burj Bank Limited 14.1 - 51,782Modaraba Deposit account HMB Islamic branch 14.2 369,908,783 129,880,712Redemption fund for Certificates of Musharaka 14.3 1 16,692

369,908,784 129,949,185371,131,886 130,639,915

112


2014 2013Note-----------------------Rupees-------------------------

15 ISSUED, SUBSCRIBED AND PAID-UP CAPITAL

2013

Certificates of Rs. 5/-193,900,000 each issued for cash 969,500,000 969,500,000

7,700,000 38,500,000 38,500,000201,600,000 1,008,000,000 1,008,000,000

16 RESERVES

Capital reservesPremium on issuance of certificates 378,000,000 378,000,000Statutory 16.1 834,540,718 777,452,032

1,212,540,718 1,155,452,032Revenue reserves

General 640,000,000 50,000,000Unrealized gain on available-for-sale investments 107,835,091 36,683,068Unappropriated profit 240,243,557 802,716,436

988,078,648 889,399,5042,200,619,366 2,044,851,536

17 SECURITY DEPOSITS AGAINST IJARAH (LEASE) ASSETS

Musta'jir's security deposits 17.1 371,237,425 319,623,527

Less: Current portion shown under current liabilities (81,132,842) (54,685,080)

290,104,583 264,938,447

18 CERTIFICATES OF MUSHARAKA

Unsecured

Certificates of Musharaka 18.1 1,533,668,767 1,007,807,729

19 TRADE AND OTHER PAYABLES

Accrued liabilities 21,381,652 14,360,102

Adjustable against ijarah (lease) contracts 19.1 91,045,949 62,035,949Advance against sale of diminishing musharaka units 1,366,922 7,063,463

Workers' Welfare Fund 12,861,211 27,288,684Management fee payable 32,948,960 115,726,134

Sales tax on management fee payable 19.2 28,542,693 22,568,120

Gratuity payable 19.3 - -

188,147,386 249,042,452

2014(Number of certificates)

201,600,000

Certificates of Rs. 5/- each issued as bonus 7,700,000

193,900,000

2014 2013Note-----------------------Rupees-------------------------

16.1 This represents profit set aside to comply with requirement of Prudential Regulations for Modarabas issued by SECP, which is not available for distribution.

17.1 These represent interest free deposits repayable at the maturity of respective ijarah (lease) terms.

18.1 The estimated share of profit paid / payable on the above unsecured finance ranges between 8.25% to 10.00% per annum (2013: 8.50% to 11.75% per annum).

Re-stated

113


19.1

19.2

19.3 Staff retirement benefits - Defined benefit plan

a General description

This relates to withholding tax deposited pertaining to ijarah (lease) vehicles. The amounts are adjustable against ijarah (lease) contracts upon receipt of refunds from tax authorities.

This represents balance payable to the Modaraba Management Company in respect of the levy of Sindh Sales Tax on management fee payable to Modaraba Management Company which has been recorded as per the provisions of The Sindh Sales Tax on Service Act, 2011.

During the prior year the provision for Sindh Sales Tax on management fee amounting to Rs. 4.164 million was reversed in the financial statements, on the basis of tax consultant's opinion. This was previously accounted for in order to reflect the excess input tax that would have been adjustable against the output tax on the other services subject to levy of sales tax and any excess input tax would have been refundable. The NBFI & Modaraba Association of Pakistan has challenged the applicability of Sales Tax on remmuneration of Management Company. The Association is of the view that this fee is not the remmuneration for the supply of services rather it is the share of profit for Management Company.

Therefore, the management went in the appeal with the commissioner of Sindh Revenue Board and the matter is not decided as yet.

As mentioned in note 4.12, the Modaraba operates an approved funded gratuity scheme for all of its permanent employees. Actuarial valuation of the scheme is carried out every year and the latest actuarial valuation was carried out as at June 30, 2014 using the Projected Unit Credit Method.

b

Present value of defined benefit obligation 17,838,624 18,720,102

Fair value of plan assets (17,838,624) (18,720,102)Net defined liability/ (assets) - -

c Amount charged to profit and loss account:

Current service cost 1,759,842 1,441,954

Interest cost 2,042,524 2,224,899Expected return on plan assets (2,134,269) (2,224,425)

1,668,097 1,442,428

d Re-measurement recognized in other comprehensive income during the year

Acturial (gain)/Loss on obligation (1,342,769) (156,097)

Acturial (gain)/loss on assets 570,391 578,516Remeasurement (gain)/loss recognized in OCI (772,378) 422,419

Total defined benefit cost recognized in P&L and OCI 895,719 1,864,847

e Movement in the liability / (asset)recognized in the balance sheet:

Balance as at July 01 - 3,747Net charge for the year 1,668,097 1,442,428

Re- measurement (gain)/loss recongnised in OCI (772,378) 422,419

Contribution to the fund (895,719) (1,868,594)

Reconciliation of balance due to defined benefit plan:

2014 2013-----------------------Rupees-------------------------

Re-stated

- -Balance as at June 30

114


f

Balance as at July 01Current service costInterest costActuarial (gain) / loss Actual benefits paid during the yearBalance as at June 30

g Movement in the fair value of plan assets:

Balance as at July 01Expected returnContributionsActuarial (loss) / gainActual benefits paid during the yearBalance as at June 30

h Principal actuarial assumptions used are as follows:

Expected rate of long term salary increase per annumFirst year salary increaseValuation discount rate

Movement in the present value of defined benefit obligation:

-----------------------Rupees-------------------------

18,720,102 15,905,3461,759,842 1,441,9542,042,524 2,224,899

(1,342,769) (156,097)(3,341,075) (696,000)

17,838,624 18,720,102

18,720,102 15,901,5992,134,269 2,224,425

895,719 1,868,594(570,391) (578,516)

(3,341,075) (696,000)17,838,624 18,720,102

13.00% 11.00%13.00% 12.30%13.00% 11.00%

-----------------------Rupees-------------------------

2014 2013 2012 2011 2010

i Comparisons for past years:

As at June 30

17,838,624 18,720,102 15,905,347 13,452,894 10,910,565Fair value of plan assets (17,838,624) (18,720,102) (15,901,599) (13,630,327) (11,098,664)Deficit / (surplus) - - 3,748 (177,433) (188,099)

(1,342,769) (156,097) 364,558 113,585 447,437

(3,341,075) (578,516) (577,403) 134,610 47,519

Present value of defined benefit obligation

Experience loss / (gain) on obligationExperience (loss) / gain on plan assets

2014 2013

2014 2013-----------------------Rupees-------------------------

Major categories / composition of plan assets are as follows:

Bank Deposit 17,838,624 18,275,493

The expected return on plan assets was determined by considering the expected returns available on the assets underlying the current investment policy. Expected yields on fixed interest investments are based on gross redemption yields as at balance sheet date. The return on plan assets was assumed to equal the discount rate. Actual return on plan assets during the year was Rs.1.514 million (2013: Rs.1.714 million).

Defined benefit plan

Contribution for the year allocated to administrative expenses 895,719 1,442,428

115


2014 2013Note-----------------------Rupees-------------------------

Expected

The expected gratuity cost charge for the year ending June 30, 2015 amounts to Rs.1.696 million. The actual cost will be determined after valuation of the Fund as at June 30, 2015 when the actuarial gains and losses arising during the year ending June 30, 2015 will be available.

19.4 The reconciliation of charity payable is as follows:

Balance as at July 01 961,857 -Addition during the year 1,456,155 1,711,857

Less: Paid to recognized charitable organisations (2,000,000) (750,000)Balance as at June 30 418,012 961,857

21 INCOME FROM IJARAH (LEASING)

Ijarah (leasing) installments 1,509,878,504 1,482,694,942Less: Depreciation on ijarah (lease) assets (1,211,961,809) (1,166,011,160)

297,916,695 316,683,782

20 CONTINGENCIES AND COMMITMENTS

Contingencies

There were no contingencies as at the balance sheet date. (2013: Nil)

Commitments

Commitments in respect of financing transactions amounted to Rs.109.900 million (2013: Rs.52.761 million).

22 ADMINISTRATIVE EXPENSES

Salaries, allowances and other benefits 27 40,712,407 40,761,139Printing, stationery and advertising 3,627,516 3,006,358

Travelling and conveyance 786,705 1,036,321

Insurance 381,824 557,373Utilities 1,811,092 826,655

Postage 472,877 485,268Newspapers and periodicals 35,190 39,853

Repairs and maintenance 1,013,333 1,340,293Telecommunication 760,605 820,217

Fees and subscriptions 3,514,193 3,517,906Legal and professional charges 2,271,769 1,266,038

Donations 22.1 840,000 936,000Depreciation on fixed assets in own use 5.2 4,842,102 4,352,880

Amortization on intangible assets 6 849,109 804,566Certificate registrar expenses 1,541,375 1,489,751

Vehicle running expenses 1,673,461 1,300,498Office expense 1,145,878 1,012,533

Staff training and workshop 280,360 292,500

Staff Hajj expenses 897,200 800,456Rent expense 1,966,999 1,821,000

I.T expenses 1,270,467 1,214,483Miscellaneous 55,867 41,712

70,750,329 67,723,800

116


22.1 The Directors of the Modaraba Management Company do not have any interest in any donees' fund to which donations were made.

23 OTHER INCOME

Dividend on shares 5,779,663 100,837,606

Gain on transfer of ijarah (lease) assets 19,671,587 19,046,700

Gain on sale of shares 15,256 779,993,176Gain on sale of owned fixed assets - net 25,199 349,200

Profit on Modaraba's deposit accounts 17,966,981 16,790,437Profit on redemption reserve fund - COM 971 495

Profit on Sukuk 79,978,020 20,763,939Profit on Islamic Investment Certificates - 17,706,015

Miscellaneous income 713,163 283,010124,150,840 955,770,578

24 OTHER OPERATING CHARGES

Loss on sale of shares 16,171 -Professional tax 100,000 200,000

Auditor's remuneration 24.1 535,000 540,800651,171 740,800

24.1 Auditor's remuneration:

Audit fee 300,000 300,000Fee for review of half yearly financial statements and

Statement of Compliance with Code of CorporateGovernance 170,000 170,000

CDC monitoring compliance 10,000 50,000Out of pocket expenses 55,000 20,800

535,000 540,800

25 FINANCIAL CHARGES

Profit on certificates of musharaka 114,566,209 102,411,937Bank commission and charges 201,505 87,478

114,767,714 102,499,415

26 SERVICE SALES TAX ON MANAGEMENT COMPANY REMMUNERATION

Current year 5,271,834 18,403,743Prior year - 4,164,377

5,271,834 22,568,120

2014 2013Note-----------------------Rupees-------------------------

117


Salaries 17,959,506 6,831,489 24,790,995 18,974,200 6,042,550 25,016,750House rent 2,284,200 1,080,900 3,365,100 2,397,600 811,800 3,209,400

Conveyance and other allowances 4,352,400 2,984,872 7,337,272 4,031,300 3,026,930 7,058,230Group insurance 1,009,782 456,699 1,466,481 1,485,754 639,123 2,124,877

Gratuity Fund 1,370,493 297,604 1,668,097 1,479,165 385,681 1,442,427Provident fund 1,429,726 654,736 2,084,462 1,443,390 466,065 1,909,455

28,406,107 12,306,300 40,712,407 29,811,409 11,372,149 40,761,139Number of persons 15 21 36 15 21 36

2014 2013

OfficersOther

employees Total TotalOfficersOther

employees

-----------------------Rupees------------------------- -----------------------Rupees-------------------------

27 REMUNERATION OF OFFICERS AND OTHER EMPLOYEES

The aggregate amount charged in the financial statements for remuneration to officers and other employees of the Modaraba is as follows:

Certain officers are also provided with self maintained cars by the Modaraba.

Ijarah (lease) installments receivable in respect of existing ijarah (lease), in the subsequent financial year ending June 30, 2015 amounts to Rs.1,200.511 million (2013: Rs.1,130.334 million). Ijarah (lease) installments recoverable within the next twelve months shall be treated as current assets for the purpose of calculating current ratio (as per BPRD Circular No. 8 dated April 11, 1998).

The related parties and associated undertakings comprise the Modaraba Management Company [Habib Modaraba Management (Private) Limited], First Habib Modaraba Employees' Provident Fund, First Habib Modaraba Gratuity Fund and Key Management Personnel. These balances outstanding to / from these parties have been included in the relevant notes to the financial statements. Transactions with related parties and associated undertakings are as follows:

28 IJARAH (LEASE) INSTALLMENTS RECEIVABLE WITHIN ONE YEAR

29 TRANSACTIONS WITH RELATED PARTIES

Relationship Nature of transaction

Balances with related parties

Modaraba Management Company 32,948,960 115,724,134

Modaraba Management Company 28,542,693 22,567,800

First Habib Modaraba Provident Fund 28,341,245 30,663,998

Expense for the year32,948,960 115,724,134

Gratuity fund 1,668,097 1,864,846

Provident fund 2,084,462 1,909,455

Payments made during the year

895,719 1,868,594

4,168,924 3,818,910

Dividend paid 100,501,732 100,501,732Modaraba Management Company

Payable to modaraba management company

First Habib Modaraba Provident Fund

Contribution to staff gratuity fund

Modaraba company's management fee

First Habib Modaraba Gratuity Fund

Sale tax on management fee payable

Contribution to staff provident fund

First Habib Modaraba Provident Fund

First Habib Modaraba Gratuity Fund

Investment in Certificate of Musharaka

Modaraba Management Company

2014 2013-----------------------Rupees-------------------------

Management fee 115,023,395 38,338,298Modaraba Management Company

118


29.1

30 CAPITAL MANAGEMENT

31 FINANCIAL INSTRUMENTS

31.1 Risk management policies

31.2 Credit Risk

Exposure to Credit Risk

No remuneration in kind has been paid by the Modaraba to the Directors and Key Management Personnel.

The Board's policy is to maintain a sound capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. The Board of Directors monitors the return on capital, which the Modaraba defines as net profit after taxation divided by total Certificate holders' equity. The Board of Directors also monitors the level of dividend to ordinary Certificate holders. There were no changes to the Modaraba's approach to capital management during the year and the Modaraba is not subject to externally imposed capital requirements.

The Modaraba’s objective in managing risks is the creation and protection of Certificate holders’ value. Risk is inherent in the Modaraba’s activities, but it is managed through a process of ongoing identification, measurement and monitoring, subject to risk limits and other controls. The process of risk management is critical to the Modaraba’s continuing profitability. The Modaraba is exposed to market risk (which includes profit rate risk and price risk), credit risk and liquidity risk arising from the financial instruments it holds.

The Modaraba primarily invests in Ijarah (lease) assets, diminishing musharaka, diversified portfolio of listed securities, Ijarah Sukuk bonds and Islamic investments instruments. Such investments are subject to varying degrees of risk, which emanate from various factors that include but are not limited to:

- Credit Risk

- Liquidity Risk

- Market Risk.

Credit risk is the risk that the counter party to a financial instrument will cause a financial loss for the Modaraba by failing to discharge an obligation. The Modaraba’s policy is to enter into financial contracts with reputable counter parties in accordance with the internal guidelines and regulator requirements.

The maximum exposure to credit risk before any credit enhancements at June 30, 2014 is the carrying amount of the financial assets as set out below:

The aging of Ijarah (lease) installments receivables at the reporting date is:

Past due 1-30 daysPast due over 30-90 days

Ijarah (lease) installments receivablesDiminishing musharaka financing

Investments Deposits

Other receivablesBank balances

2014 2013-----------------------Rupees-------------------------

1,061,119,580 546,817,996

9,915,676 3,520,410975,232,743 997,145,487

535,850 534,85024,197,315 19,309,873

371,131,886 130,639,9152,442,133,050 1,697,968,531

9,410,578 2,177,958505,098 1,342,452

9,915,676 3,520,410

119


Concentration is the relative sensitivity of the Modaraba’s performance to developments affecting a particular industry or geographical location.

Concentration of risks arise when a number of financial instruments or contracts are entered into with the same counterparty, or where a number of counterparties are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political or other conditions.

The Modaraba’s portfolio of financial assets is broadly diversified and transactions are entered into with diverse credit worthy counterparties thereby mitigating any significant concentration of credit risk. Details of Modaraba's concentration of credit risk by industrial distribution are detailed in note 36 to the financial statements.

Impaired Assets

Refer note 4.3 and 5.1 to the financial statements for details on impairment of assets.

Liquidity risk is the risk that the Modaraba will not be able to generate sufficient cash resources to settle its obligations in full as they fall due or can only do so on terms that are materially disadvantageous.

In the case of Modaraba, the liquidity level of Modaraba remained on satisfactory level during the year and Modaraba did not face any difficulty or problem for generation of liquidity.

Note 33 to the financial statements summarizes the maturity profile of the Modaraba's financial instruments.

Mitigating / managing the risk

Modaraba’s policy is to invest the majority of its assets in investments that are traded in an active market and can be readily disposed off. Only a limited proportion of its investments are not actively traded.

The risk that fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices of securities due to a change in credit rating of the issuer or the instrument, change in market sentiments, speculative activities, supply and demand of securities and liquidity in the market.

Exposure

The Modaraba is exposed to unfavorable changes in the fair values of investments as a result of changes in prices of securities.

As at June 30, 2014, the fair value of equity and debt securities exposed to price risk was as follows:

Concentration of Credit Risk

31.3 Liquidity risk

31.4 Market Risk

a Market Price Risk

Average Cost Fair Value Average Cost Fair Value2014 2014 2013 2013

67,397,652 800,000,000 867,397,652

146,192,743 829,040,000 975,232,743

60,302,420 900,160,000 960,462,420

96,985,487 900,160,000 997,145,487

Ijarah Sukuk bondsEquity securities

Particulars

-----------------------------------------------------Rupees--------------------------------------------------------

Risk Management

The Modaraba’s policy is to manage price risk through diversification and selection of securities and other financial instruments within specified limits set by Investment Committee.

The majority of the Modaraba’s investments are publicly traded and are valued at the rates provided by stock exchange which is set as per the trading trend and volumes in the security.

120


b Profit rate risk

Profit rate risk arises from the effects of fluctuations in the prevailing levels of market profit rates on the fair value of financial assets and liabilities and future cash flows.

Risk exposure

The Modaraba has Ijarah (leasing) portfolio. The majority of Ijarah (leasing) portfolio is linked with KIBOR rate as a bench mark. The Modaraba reviews KIBOR on Ijarah (leasing) portfolio on quarterly / six monthly basis.

As at June 30, 2014, the profile of the Modaraba’s variable value financial instruments were as follows:

2014 2013-----------------------Rupees-------------------------

800,000,000 900,160,000369,908,783 129,932,493

Diminishing musharaka financing 1,012,672,680 369,309,326

Certificate of musharaka (1,533,668,767) (1,007,807,729)648,912,696 391,594,090

Ijarah Sukuk bonds

Liability

Islamic deposits

Variable rate instruments

Fair value sensitivity analysis for variable rate instruments

An increase of 100 basis points in interest rates would have increased / decreased the profit and loss by the amounts shown below. Reduction in interest rates by 100 basis points would have a vice versa impact. This analysis assumes that all variables remain constant. The analysis is performed on the same basis for the comparative period.

2014 2013

8,000,000 9,001,600

10,126,727 3,693,0933,699,088 1,299,325

(15,336,688) (10,078,077)100 basis points Certificate of musharaka

Changes in profit / (loss)(Increase / Decrease)

Asset / liability class (Having variable interest rates)

Ijarah Sukuk bonds

(+/-)

100 basis points

Assets

Liability

100 basis points Diminishing musharaka financing

Islamic deposits 100 basis points

-----------------------Rupees-------------------------

Above sensitivities are calculated on the assumption that all factors remain constant except interest rates and resulting variation in fair values of the subjugated investments and impact on the profit and loss.

Risk Management / Mitigation

The Modaraba monitors the interest rate environment on a regular basis and alters the portfolio mix of fixed and floating rate securities.

The Modaraba’s policy requires the Modaraba management to manage this risk by measuring the mismatch of the interest rate sensitivity gap of financial assets and liabilities and calculating the average duration of the portfolio of fixed interest securities.

121


The average effective duration of the Modaraba’s portfolio is a measure of the sensitivity of the fair value of the Modaraba’s fixed interest securities to changes in market interest rates.

The Modaraba’s policy refrains from holding interest bearing instruments that induce the average effective duration of the fixed interest portfolio to pass the benchmark of the average duration.

Operational risk is the risk of direct or indirect loss arising from a wide variety of causes associated with the processes, technology and infrastructure supporting the Modaraba’s operations either internally within the Modaraba or externally at the Modaraba’s service providers, and from external factors other than credit, market and liquidity risks such as those arising from legal and regulatory requirements and generally accepted standards of investment management behavior. Operational risks arise from all of the Modaraba’s activities.

The Modaraba’s objective is to manage operational risk so as to balance limiting of financial losses and damage to its reputation with achieving its objective of generating returns for certificate holders. The primary responsibility for the development and implementation of controls over operational risk rests with the Board of Directors of the Management Company. This responsibility encompasses the controls in the following areas:

- requirements for appropriate segregation of duties between various functions, roles and responsibilities;

- requirements for the reconciliation and monitoring of transactions;

- compliance with regulatory and other legal requirements;

- documentation of controls and procedures;

- requirements for the periodic assessment of operational risks faced, and the adequacy of controls and procedures to address the risks identified;

- ethical and business standards;

- risk mitigation, including insurance where this is effective.

The Modaraba’s accounting policy on fair value measurements of the investments is detailed in note 4.5 to these financial statements.

The Modaraba measures fair values using the following fair value hierarchy that reflects the significance of the inputs used in making the measurements:

Level 1: Fair value measurements using quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2: Fair value measurements using inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).

Level 3: Fair value measurements using inputs for the asset or liability that are not based on observable market data (i.e. unobservable inputs).

As at June 30, 2014, all the investments were categorised in level 1 except for Sukuk bonds which are categorized in level 2.

31.5 Operational risks

32 FAIR VALUE OF FINANCIAL INVESTMENTS

122


33 MATURITIES OF ASSETS AND LIABILITIES

Liquidity risk is the risk that the Modaraba will be unable to meet its net funding requirements. To guard against this risk, the Modaraba has adequate funding sources and assets are managed with liquidity in mind, maintaining a healthy balance of working capital.

AssetsIjarah (lease) fixed assets - tangible 2,868,616,976 329,818,690 2,538,798,286 -Owned fixed assets - tangible 11,204,147 - 11,204,147 -Intangible assets 1,500,691 - 1,500,691 -Long term advances, deposits and prepayments 1,200,050 - 1,200,050 -Diminishing musharaka financing 1,061,119,580 444,546,723 616,572,857 -Investments 975,232,743 975,232,743 - -Ijarah (lease) installments receivable 9,915,676 9,915,676 - -Advances and short term prepayments 8,455,814 8,455,814 - -Other receivables 53,303,169 53,303,169 - -Tax refund due from Government 31,314,018 31,314,018 - -Cash and bank balances 371,131,886 371,131,886 - -

5,392,994,749 2,223,718,719 3,169,276,031 -

LiabilitiesSecurity deposits against ijarah (lease) assets 371,237,425 81,132,842 290,104,583 -Certificates of musharaka 1,533,668,767 1,533,668,767 -Unearned ijarah (lease) and diminishing musharaka installments 3,979,895 3,979,895 - -Advance ijarah (lease) and diminishing musharaka installments 32,471,878 32,471,878 - -Trade and other payables 188,147,386 188,147,386 - -Profit payable on certificate of musharaka 28,379,755 28,379,755 - -Taxation 2,790,833 2,790,833 - -Unclaimed profit distribution 23,699,444 23,699,444

2,184,375,383 1,894,270,800 290,104,583 -3,208,619,366 329,447,919 2,879,171,448 -

Represented by:Issued, subscribed and paid-up capital 1,008,000,000Reserves 2,200,619,366

3,208,619,366

AssetsIjarah (lease) fixed assets - tangible 2,941,637,969 247,725,896 2,693,912,073 -Owned fixed assets - tangible 13,427,992 - 13,427,992 -Intangible assets 1,409,165 - 1,409,165 -Long term advances, deposits and prepayments 2,492,650 - 2,492,650 -Diminishing musharaka financing 546,817,996 191,350,842 355,467,154Investments - available for sale 997,145,487 997,145,487 - -Investments - held to maturity - -Ijarah (lease) installments receivable 3,520,410 3,520,410 - -Advances and short term prepayments 11,318,384 11,318,384 - -Other receivables 32,973,716 32,973,716 - -Tax refund due from Government 37,903,024 37,903,024 - -Cash and bank balances 130,639,915 130,639,915 - -

4,719,286,707 1,652,577,673 3,066,709,034 -

LiabilitiesSecurity deposits against ijarah (lease) assets 319,623,527 54,685,080 264,938,447 -

Rupees

Total Up to one yearOver one year to

five yearsOver five years

2013

Rupees

2014

Up to one yearTotalOver one year to

five yearsOver five years

Certificates of musharaka 1,007,807,729 1,007,807,729 - -Unearned ijarah (lease) and diminishing musharaka installments 27,255,215 27,255,215 -Advance ijarah (lease) and diminishing musharaka installments 19,804,076 19,804,076 - -Trade and other payables 249,042,452 249,042,452 - -Profit payable on certificate of musharaka 18,602,889 18,602,889 - -Taxation - net 2,790,833 2,790,833 - -Unclaimed profit distribution 21,508,450 21,508,450 - -

1,666,435,171 1,401,496,724 264,938,447 -3,052,851,536 251,080,949 2,801,770,586 -

Represented by:Issued, subscribed and paid-up capital 1,008,000,000Reserves 2,044,851,536

3,052,851,536

-

- -

-

- -

-

123


34 FINANCIAL ASSETS AND LIABILITIES

Maturity after Maturity afterMaturity upto one year Maturity upto one year and

one year upto five years Sub-total one year upto five years Sub-total Total

Financial assets

Cash and bank balances 369,908,784 - 369,908,784 1,223,102 - 1,223,102 371,131,886

Other receivables - - - 24,197,315 - 24,197,315 24,197,315

Investments 829,040,000 - 829,040,000 146,192,743 - 146,192,743 975,232,743

Ijarah (lease) installments receivables - - - 9,915,676 - 9,915,676 9,915,676

Advances - - - 5,965,428 - 5,965,428 5,965,428

Long term deposits - - - - 535,850 535,850 535,850

Diminishing musharaka financing 444,546,723 616,572,857 1,061,119,580 - - - 1,061,119,580

1,643,495,507 616,572,857 2,260,068,364 187,494,264 535,850 188,030,114 2,448,098,478

Financial liabilities

Security deposits against ijarah (lease)

assets - - - 81,132,842 290,104,583 371,237,425 371,237,425

Certificates of musharaka 1,533,668,767 - 1,533,668,767 - - 1,533,668,767

Trade and other payables - - - 82,873,304 - 82,873,304 82,873,304

Unclaimed profit distribution - - - 23,699,444 - 23,699,444 23,699,444

1,533,668,767 - 1,533,668,767 187,705,590 290,104,583 477,810,173 2,011,478,940

On balance sheet gap 109,826,740 616,572,857 726,399,597 (211,326) (289,568,733) (289,780,059) 436,619,538

Ijarah (lease) assets 329,818,690 2,538,798,286 2,868,616,976 - - - 2,868,616,976

*Ijarah (lease) assets has been included above in order to depict a true picture of the gap between the assets and liabilities of the Modaraba.

The expected rates of profit for financial assets and liabilities are mentioned in the respective notes to the financial statements.

Yield / profit rate risk arises from the possibility that changes in yield / profit rates will affect the value of financial instruments. All financial instruments of the Modaraba are on a profit and loss sharing basis, or on variable profit rate.

Modaraba recognizes market risk as the exposure created by potential changes in the market prices and rates.

The fair values of traded instruments is based on quoted market prices. Fair value of future Ijarah (lease) installments receivable against Ijarah (lease) assets, other assets, other liabilities and other items cannot be calculated with sufficient reliability due to absence of current active market for such assets and liabilities.

(i) Yield / profit rate risk

(ii) Market risk

(iii) Fair values of financial assets and liabilities

Non-Profit bearingProfit bearing

-

124


35 SEGMENT BY CLASS OF BUSINESS OF FINANCING ASSETS

Rupees Rupees %

Auto and allied 1.48 83,175,404 2.38

Financial institutions 3.22 126,417,097 3.62Cable and electric goods 6.35 109,691,106 3.14

Fertilizer 3.98 123,602,079 3.54Pharmaceutical 19.72 651,943,876 18.69

Individuals 2.14 61,735,230 1.77Education 3.14 41,036,884 1.18

Steel and engineering 0.80 48,376,748 1.39Food and allied 9.17 285,545,747 8.19

Fuel, power and energy 0.93 33,256,612 0.95Glass and ceramics 0.32 20,178,804 0.58

Health care 1.97 64,358,999 1.84

Information technology 5.81 241,610,833 6.93Paper and board 0.37 19,473,096 0.56

Services 15.08 599,070,983 17.17Sugar and allied 4.19 147,190,969 4.22

Oil & gas exploration 2.01 72,559,881 2.08Textile 6.04 168,709,011 4.84

Cargo, courier logistic services 2.91 209,744,295 6.01Refinery, lubricant, oil and gas marketing 1.24 45,349,925 1.30

Cement 0.40 8,379,000 0.24Leather and Tennaries 0.72 18,902,450 0.54

Chemical 8.01 269,041,233 7.71Construction 0.00 24,770 0.00

Others 0.00 39,080,932 1.12

58,131,173126,385,902

249,452,732

156,427,333774,789,325

84,058,596123,587,077

31,300,431360,224,629

36,495,96112,534,455

77,404,137228,492,847

14,528,320592,676,253

164,687,56178,873,221

237,521,275

114,399,67948,715,145

15,810,68428,320,477

314,919,343-

-3,929,736,556 100.00 3,488,455,964 100.00

35.1 Modaraba's operations are restricted to Pakistan only.

%

20132014

36 CREDIT RISK AND CONCENTRATION OF CREDIT RISK

Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss.

The Modaraba has established procedures to manage credit exposure including credit approvals, credit limits and obtaining collaterals.

Concentration of credit risk arises when a number of counterparties are engaged in similar business activities or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political or other considerations. Concentration of credit risk indicates the relative sensitivity of the Modaraba's performance to developments affecting a particular industry.

125


The Modaraba manages concentration of credit risk exposure through diversification of portfolio of its customers to avoid undue concentration of risk with specific industry, sector, or group as follows:

Segment by class of business

Financial institutions 29,178,463 - 19,062,960 86,689Textile - 505,098 - 177,578Chemical and pharmaceutical - - - 12,905I.T and Telecommunications 62,400 7,234,868 46,800 695,769Consumer - - - 23,029Food and allied 1,050 - 1,050 -Fuel and energy 8,000 - 8,000 -Insurance companies - - - -FMCG 1,868,987 - 2,341,959Others 1,394,786 306,723 1,445,239 182,481Services - - - -

30,644,699 9,915,676 20,564,049 3,520,410

Advances, deposits, prepayments and other receivables

Ijarah (lease) installments receivables

2014

Advances, deposits, prepayments and other receivables

Ijarah (lease) installments receivables

2013

-----------------------Rupees-------------------------

2014 2013-----------------------Rupees-------------------------

37 EARNINGS PER CERTIFICATE

Profit for the year 285,443,429 992,803,556Weighted average number of certificates 201,600,000 201,600,000Earnings per certificate 1.42 4.92

Re-stated

37.2 Diluted

38 SEGMENT INFORMATION

No figure for diluted earnings per certificate has been presented as the Modaraba has not issued any instruments which would have an impact on earnings per certificate when exercised.

As per IFRS 8, ""Operating Segments"", operating segments are reported in a manner consistent with the internal reporting used by the chief operating decision maker. The chief executive officer of the management company has been identified as the chief operating decision maker, who is responsible for allocating resources and assessing performance of the operating segments.

The chief Executive officer is responsible for Modaraba's entire product portfolio and consider business to have a single operating segment. The Modaraba's assets allocation decisions are based on a single integrated investment strategy and the Modaraba's performance is evaluated on a overall basis.

The internal reporting provided to the chief executive officer for the Modaraba's assets, liabilities and performance is prepared on a consistent basis with the measurement and recognition principles of approved accounting standards as applicable in Pakistan.

The Modaraba's is domiciled in Pakistan. All of the Modaraba's income is from the investments in entities incorporated in Pakistan.

37.1 Basic

Basic earnings per certificate are calculated by dividing the net profit for the year by the weighted average number of certificates outstanding during the year as follows:

126


39 CASH GENERATED FROM OPERATIONS

Profit for the year 285,443,429 992,803,556Adjustment for:

Gain on disposal of assetsIjarah (lease) (19,671,587) (19,046,700)In own use - net (25,199) (349,200)

Depreciation fixed assetsIjarah (lease) assets 1,211,961,809 1,166,011,160In own use 4,842,102 4,352,880

Loss on sale of shares 16,171 -Owned assets sold / written off 25 -Amortization of intangible assets 849,109 804,566Provision for gratuity 1,668,097 1,442,428Dividend income (5,779,663) (100,837,606)Gain on disposal of investments (15,256) (779,993,176)Profit paid to COM holder's 114,566,209 102,411,937Movement in working capital 39.1 (88,775,728) 123,782,190

1,505,079,519 1,491,382,034

40 PROFIT DISTRIBUTION AND APPROPRIATION

41 DATE OF AUTHORIZATION FOR ISSUE

42 CORRESPONDING FIGURES

43 GENERAL

Subsequent to the year ended June 30, 2014 the Board of Directors of the Management Company has declared a final distribution of Re.1.10 per certificate, amounting to total profit distribution of Rs.221.760 million (2013: Re.1/- per certificate amounting to total profit distribution of Rs.201.600 million) in its meeting held on July 23, 2014.

These financial statements were authorized for issue on July 23, 2014 by the Board of Directors of the Modaraba Management Company.

Corresponding figures have been rearranged and reclassified, wherever necessary, for the purpose of comparison. However no significant rearrangement or reclassification has been made in these financial statements during the current year.

Figures have been rounded off to the nearest rupee.

2014 2013Note-----------------------Rupees-------------------------

39.1 Movement in working capital

Decrease / (increase) in current assets: Ijarah (lease) installments receivable (6,395,266) (102,707) Advances and short term prepayments 2,862,570 (6,227,653)

Tax refund due from Government 6,589,006 (9,432,310) Other receivables (20,329,454) (8,124,109)

Increase / (decrease) in current liabilities:

12,667,802 1,098,619

(23,275,320) 9,753,868

Trade and other payables (60,895,066) 136,816,481(88,775,728) 123,782,190

Advance ijarah (lease) and diminishing musharaka installmentsUnearned ijarah (lease) and diminishing musharaka installments


Re-stated

127


Glossary

AML

CEO

CFO

FHM

Companies Ordinance

CSR

Earning per share (EPS)

IASB

IFRS

ITO

KIBOR

KYC

WWF

EOBI

SRO

Anti Money Laundering

Chief Executive Officer

Chief Financial Officer

First Habib Modaraba

Companies Ordinance 1984

Corporate Social Responsibility

Calculated by dividing the profit after interest, tax by the

weighted average number of Ordinary Shares in issue.

International Accounting Standards Board

International Financial Reporting Standards

Income Tax Ordinance, 2001

Karachi Inter Bank Offer Rate

Know your Customer

Workers Welfare Fund

Employees Old Age Benefits Institution

Statutory Regulatory Order

IFAC

CCG

IFAS

SAFA

SAARC

NBFI & Modaraba

MAP

MAP

MAP

PACRA

ICF

ERP

IFSB

IIFM

IBP

International Federation of Accountants

Code of Corporate Governance

Islamic Financial Accounting Standard

South Asian Federation of Accountants

South Asian Association of Regional Cooperation

NBFI & Modaraba Association of Pakistan

Management Association of Pakistan

Modaraba Association of Pakistan

Marketing Association of Pakistan

Pakistan Credit Rating Agency Limited

Internal Control Framework

Enterprise Resource Program

Islamic Financial Services Board

International Islamic Financial Market

Institute of Bankers of Pakistan

128

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